The following terms are used to describe various economic characteristics of cos

Question

The following terms are used to describe various economic characteristics of costs:

Opportunity Cost

Out-of-pocket cost

Sunk cost

Differential cost

Marginal cost

Average cost

Required: Choose one of the preceding terms to characterize each of the amounts described below. Each term may be used only once.

A. The cost of building an automated assembly line in a factory is $5,000,000; a manually operated assembly line would cost $3,000,000. What economic term is used to describe difference between these two amounts.

B. The management of a office building uses 2,000 square feet of space in the building for its headquarters. This space could be rented for $40,000. What economic term describes this lost rental revenue?

C. Inventory that was purchased 4 years ago and is considered obsolete.

D. The cost of adding 1 extra child to a private school.

Explanation / Answer

A. Differential Cost

B. Opportunity Cost

C. Sunk Cost

D. Marginal Cost

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