Scenario 18.1: It Is the Factory's Choice Whether to Install a Filter

question 32

Multiple Choice

Scenario 18.1:
It is the factory's choice whether to install a filter. It is the choice of the nearby fishermen whether to install a treatment plant. Dollar figures show profit. The factory and the fishermen can negotiate costlessly, and no one else is affected by the result.
Factory Fishermen
A: No filter or treatment plant $10,000 $2,000
B: Filter; no treatment plant $6,000 $10,000
C: No filter; treatment plant $10,000 $4,000
D: Filter; treatment plant $6,000 $6,000
-Refer to Scenario 18.1. If the fishermen are given the right to clean water,

• A) the outcome will be more efficient than if the factory is given the right to use the water as it sees fit.
• B) the outcome will be less efficient than if the factory is given the right to use the water as it sees fit.
• C) the efficient outcome will occur no matter who is given which property right, and the individual gains will be the same in each case.
• D) the factory will be forced to shut down.
• E) the efficient outcome will occur no matter who is given which property right, but how that maximum gain is split will be determined during bargaining.

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Definitions:

Unit Contribution Margin

The amount by which the selling price of a unit exceeds its variable costs, indicating how much it contributes to covering fixed costs and generating profit.

Fixed Expenses

Expenses that remain constant regardless of production or sales volume, including rent, salaries, and insurance.

Sales Mix

The relative proportions in which a company’s products are sold. Sales mix is computed by expressing the sales of each product as a percentage of total sales.

Total Profits

The sum of all profits made by a business within a certain period, after all expenses have been deducted from total revenues.