Question

A firm\'s CEO seeks to extend the firm\'s production through the opening of a new plant. In his decision, he takes into consideration the elements below. Each element is related to one of the five foundations of economics. Match each foundation with the related element.

1. The company will receive a $1 billion grant from the government for the opening of a new plant.

2. Outsourcing some production to firms with comparative advantages may be cheaper than opening a new plant.

3.The firm can either build the new plant or launch a new product line by the end of the year, but it cannot do both.

4. The increase in revenue from the opening of the new plant is projected to be higher than the increase in costs.

5. The cost of the new plant will prevent the launch a new product line whose sales are supposed to increase firm\'s revenues by 10% by the end of the year.

Possible answers: Incentive, Marginal Thinking, Trade-off, Trade creates value, and Opportunity Cost

Answer 1

1. The company will receive a $1 billion grant from the government for the opening of a new plant.

Answer: incentive

2. Outsourcing some production to firms with comparative advantages may be cheaper than opening a new plant.

Answer: trade creates value

3. The firm can either build the new plant or launch a new product line by the end of the year , but it cannot do both.

Answer: trade-off

4. The increase in revenue from the opening of the new plant is projected to be higher than the increase in costs.

Answer: marginal thinking

5. The costvof the new plant will prevent the launch of a new product line whose sales are supposed to increase firm's revenues by 10% by the end of the year.

Answer: opportunity cost