Name: Class: Date: - Chapter 1 Copyright MacmillanLearning. Poweredb...

Name: Class: Date: Chapter 1 Copyright MacmillanLearning. Poweredby Cognero.Page 1 1.International House of Pancakes (IHOP) is a U.S.-based multinational restaurant chain that specializes in breakfast food. Due to declining sales, an IHOP franchisee must consider closing up to three of her least profitable locations. She meets with two consultants to discuss potential plans. The first consultant offers two plans. Plan A keeps one location open with certainty. Plan B has a one-in-three chance of saving all three locations but a two-in-three chance of saving no locations. The second consultant also offers two plans. Plan C will result in losing two locations with certainty. Plan D has a two-in-three chance of losing all locations but a one-in-three chance of losing no locations. If the franchisee chooses Plan A, she should also choose Plan:

• No plan results in the same outcome as Plan A.
• B.
• C.
• D.

ANSWER: c

2.International House of Pancakes (IHOP) is a U.S.-based multinational restaurant chain that specializes in breakfast food. Due to declining sales, an IHOP franchisee must consider closing up to four of his least profitable locations. He meets with two consultants to discuss potential plans. The first consultant offers two plans. Plan A will result in losing two locations with certainty. Plan B has a three-in-four chance of losing all locations but a one-in-four chance of losing no locations. The second consultant also offers two plans. Plan C keeps two locations open with certainty. Plan D has a one-in-four chance of saving all four locations but a three- in-four chance of saving no locations. If the franchisee chooses Plan B, he should also choose Plan:

• No plan results in the same outcome as Plan B.
• B.
• C.
• D.

ANSWER: d

3.International House of Pancakes (IHOP) is a U.S.-based multinational restaurant chain that specializes in breakfast food. Due to declining sales, an IHOP franchisee must consider closing up to three of her least profitable locations. She meets with two consultants to discuss potential plans. The first consultant offers two plans. Plan A will result in losing two locations with certainty. Plan B has a two-in-three chance of losing all locations but a one-in-three chance of losing no locations. The second consultant also offers two plans. Plan C keeps one location open with certainty. Plan D has a one-in-three chance of saving all three locations but a two- in-three chance of saving no locations. If the franchisee applies the cost-benefit principle, which combination of plans reflects a consistent decision?

• Plan C and Plan A
• Plan B and Plan A
• Plan D and Plan A
• Plan C and Plan B

ANSWER: a

4.You are a small business owner preparing to launch your first ad campaign to attract new customers, and must decide whether to learn about advertising yourself or hire a professional to launch the campaign. The campaign will last three months. If you hire a professional, you'll have to pay them a lump sum of $1,000 for the entire campaign. But if you decide to do it yourself, you'll take a course that costs $200 to introduce you to Principles of MicroEconomics 2e Betsey Stevenson, Justin Wolfers (Test Bank All Chapters, 100% Original Verified, A+ Grade) 1 / 4

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the skill. You'll also pay an employee $340 per month to work some of the hours you normally work while you manage the campaign. Would it be better to hire a professional rather than doing the campaign yourself?

• Yes, because your economic surplus is $220.
• Yes, because your full set of costs is only $540.
• No, because the benefit of not having to do it yourself is greater than the cost of the professional.
• No, because you can increase your economic surplus if you do it yourself.

ANSWER: a

• You are a small business owner preparing to launch your first ad campaign to attract new customers, and

must decide whether to learn about advertising yourself or hire a professional to launch the campaign. The campaign will last three months. If you hire a professional, you'll have to pay them a lump sum of $1,200 for the entire campaign. But if you decide to do it yourself, you'll take a course that costs $200 to introduce you to the skill. You'll also pay an employee $320 per month to work some of the hours you normally work, while you manage the campaign. If you hire the professional, your total benefit would be all the money you avoid spending on doing the campaign yourself. What is the total benefit of hiring the professional?

• $1,160
• $200
• $320
• $960

ANSWER: a

• Your $10 donation to a charity provides one blanket to an unhoused person. Given that you followed the

Rational Rule for Consumers in the transaction, you can conclude that your willingness to pay for this type of

generosity is at least:

• $1.
• $5.
• $8.
• $10.

ANSWER: d

• You are a math tutor, and you offer in-home tutoring on weekday afternoons for $20 an hour. On Saturdays,

you tutor students hourly for free at the community center. Since you follow the Rational Rule for Consumers, which statement can you conclude is TRUE?

• Your economic surplus rises or at least remains unchanged when you tutor at the community center.
• You couldn't gain any economic surplus from tutoring at the community center since you earn $0 per hour.
• You can't compare the two types of tutoring because you can't quantify how much donating your time means to you.
• The time you spend tutoring the students on weekday afternoons lowers your economic surplus.

ANSWER: a

• A few years back, Netflix signed a $100 million deal with Jerry Seinfeld, which included two new stand-up

specials and the rights to some of Seinfeld's previous work. Which statement can you conclude is TRUE?

• The $100 million deal lowered Netflix's economic surplus.
• Netflix is worse off because of the cost of the $100 million. 2 / 4

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• The $100 million deal provided fewer total benefits than total cost to Netflix.
• The cost of the $100 million deal was no greater than the benefits of the deal.

ANSWER: d

• A few years back, Netflix signed a $100 million deal with Jerry Seinfeld, which included two new stand-up

specials. Which statement can you conclude is FALSE?

• The transaction lowered the comedian's economic surplus.
• The deal was a voluntary exchange between Netflix and the comedian.
• For Netflix, the cost of the deal was no greater than the benefits of the deal.
• The benefits of the deal were at least equal to the cost for the comedian.

ANSWER: a

• You are on the marketing team for Kraft. Knowing that most people base their decisions on how things are

described, your team must determine the best language to entice people to buy Kraft cheese. Your team is choosing between describing the package content as containing "5% fat" or as "95% fat-free." What is the term for why most people would react differently to the two phrases?

• framing effect
• cost-benefit analysis
• willingness to pay
• economic surplus

ANSWER: a

• When you're shopping at Target, you notice a sign in large bold letters that reads, "Free $5 gift card."

Deciphering the fine print, you determine that you would have to spend $60 on laundry detergent to receive the gift card. Which term explains why Target puts the word "Free" in large bold letters?

• framing effect
• cost-benefit analysis
• willingness to pay
• economic surplus

ANSWER: a

• You just got a new puppy, and you need to determine the best way to have him cared for while you are at

work. You could enroll your puppy in a doggy daycare in your neighborhood for $22 per day. Alternatively, your friend, who works from home, could care for your puppy for only $10 per day. However, your friend lives a few miles away, so it would cost you $6 per day in gas and $10 per day in time to drop your puppy off and pick him up. If you choose to take your puppy to daycare, are you correctly applying the cost-benefit principle?

• Yes, because you are maximizing your economic surplus by enrolling him in daycare.
• Yes, because you are maximizing your willingness to pay by paying $22 per day.
• No, because your economic surplus would be higher if you only paid $10 per day.
• No, because your costs would be lower if you choose your friend's house.

ANSWER: a

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• You just got a new puppy, and you need to determine the best way to have her cared for while you are at

work. You could enroll your puppy in a doggy daycare in your neighborhood for $24 per day. Alternatively, your friend, who works from home, could care for your puppy for only $10 per day. However, your friend lives a few miles away, so it would cost you $6 per day in gas and $12 per day in time to drop your puppy off and pick her up. If you choose to take your puppy to daycare, what is your economic surplus?

• $4
• $14
• $24
• $18

ANSWER: a

• You own a food truck, and you've been operating in the parking lot of your friend's business. You pay your

friend $900 per month to park at their business, and your food truck revenue is $6,000 per month. You're considering whether you should continue to park in your friend's lot or move to another location. Your revenue in the new location would be $10,500 per month, but you'd have to pay $1,500 per month to park there. You would also have to buy more fresh ingredients to meet the increased sales, so your monthly operating costs would increase by $600. If you choose to keep parking in your friend's lot, are you correctly applying the cost- benefit principle?

• Yes, because you are maximizing your economic surplus by parking in your friend's lot.
• Yes, because moving to the new location would decrease your economic surplus.
• No, because your economic surplus varies depending on how you frame your costs.
• No, because you could increase your economic surplus by moving to the new location.

ANSWER: d

• You just moved into your new apartment, which has washer and dryer hookups, but your apartment

complex doesn't provide washers and dryers. You don't want to go to a laundromat. You can rent a washer and dryer set from an appliance rental company for $30 per month. Alternatively, you could buy a set for $1,100, which you could sell after one year for $700, or $600 after two years. Should you buy or rent the set? Choose the correct statement.

• If you plan to stay in the apartment for one year, you should rent the set to earn $40 worth of economic surplus.
• If you plan to stay in the apartment for one year, you should buy the set to earn $40 worth of economic surplus.
• If you plan to stay in the apartment for two years, you should rent the set to earn $220 worth of economic surplus.
• If you plan to stay in the apartment for two years, you should buy the set to earn $500 worth of economic surplus.

ANSWER: a

• You just moved into your new apartment, which has washer and dryer hookups, but your apartment

complex doesn't provide washers and dryers. You don't want to go to a laundromat. You can rent a washer and dryer set from an appliance rental company for $30 per month. Alternatively, you could buy a set for $1,100, which you could sell after one year for $700, or $600 after two years. You plan to stay in this apartment for two years, since it's near your job. Should you buy or rent the set?

• You should rent the set because renting earns $40 worth of economic surplus.
• You should rent the set because renting earns $400 worth of economic surplus.
• You should buy the set because buying earns $220 worth of economic surplus.
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