A Local Bank Is Contemplating Opening a New Branch Bank

question 72

Multiple Choice

A local bank is contemplating opening a new branch bank in a large superstore across town from their main office. It is estimated that the new branch will generate $20,000 after expenses each month. The manager wonders if all these revenues should be considered an incremental cash flow. Given this information, which of the following statements is correct?

• A) $20,000 is generated by the new branch bank and therefore it is an incremental cash flow.
• B) We would first need to assess the opportunity cost of placing a branch in a different location to answer this question.
• C) Some amount less than the $20,000 is incremental because of substitutionary effects.
• D) Some amount less than the $20,000 is incremental because of complementary effects.

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Definitions:

Competitive Market

A market structure characterized by many buyers and sellers, freedom of entry and exit, and products that are similar, leading to competition driving prices to equilibrium.

Lowest Price

the minimum price at which a product or service is offered in the market.

Producer Surplus

The difference between the amount that producers are willing to accept for a good or service and the actual amount they receive, due to higher market prices.

Supply Curve

A graphical representation showing the relationship between the price of a good and the quantity of that good that producers are willing to supply.