You Value Your Economics Textbook at $40

question 66

Multiple Choice

You value your economics textbook at $40. Someone else values it at $30, but that person is willing to pay you $35 for your textbook. Would selling your textbook to this person for $35 be Pareto efficient?

• A) Yes, because you received the maximum amount the other person would have been willing to pay for the textbook.
• B) Yes, the person paid you $35 for the book so his net benefit was -$5, whereas your net benefit was also -$5. This exchange is Pareto efficient because each of you have the same net benefit.
• C) Yes, because both of you are better off as a result of the trade.
• D) No, because even though he was willing to pay more for the book than he valued it at, you would not receive as much as you value it at, so you would be made worse off.

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Definitions:

Profit on Sale-Leaseback

This refers to the gain a company realizes when it sells an asset and immediately leases it back from the buyer, thus continuing to use the asset without owning it.

Amortization

A process of gradually writing off the initial cost of an asset over a period.

Interest Cost

Represents the total expense over the life of a borrowing, calculated as the difference between the amount borrowed and the amount repaid.