Practice Test 2
1. Simon and Erica give up their lecturing jobs in the Economics Department to set up their own
consulting firm. Simon and Erica earned $50,000 per year each as lecturers. To set up the
business they must buy an office for $50,000. Should they choose to cease operating their
business at some future date they know they will be able to sell the office for $40,000. If they
did not buy the office they would have invested the money they spent on the office and earned
an annual rate of interest of 10 percent. They also hire a research assistant. The salary cost of the
research assistant is $50,000 per annum. In its first year of operation Simon and Erica expect to
earn revenue of $20,000.
What is the total opportunity cost to Simon and Erica of setting up their consulting firm for one
year?
a) $65,000
b) $100,000
c) $165,000
d) At least $200,000
e) $55,000
2. Global warming means that demand for ice-cream will increase over time. Increases in the
price of milk mean that the cost of production of ice-cream will rise. Assume the market for ice
cream is perfectly competitive. What would be the likely consequences of these changes for the
market for ice-cream?
a) The equilibrium price of ice-cream will rise, but the effect on equilibrium quantity traded is
