Mr Capps Recently Built a Dental Floss Factory in Montana

question 59

Multiple Choice

Mr. Capps recently built a dental floss factory in Montana. It cost $500,000 and is expected to last ten years. The plant can only be used to produce dental floss and will have no scrap value. When a recession occurs, the yearly revenue from the plant declines to $35,000, compared to costs of $25,000 just for the variable resources required to produce the current rate of output. Mr. Capps should

• A) shut down since he is experiencing economic losses (in other words, he will not get his $500,000 back).
• B) reduce the price of dental floss if his demand is inelastic in order to increase his revenue.
• C) raise the price of dental floss if his demand is elastic in order to increase his revenue.
• D) continue to operate since he is covering his variable costs and the cost of the plant is a sunk cost.

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Definitions:

Coupon Rate

The interest rate stated on a bond or fixed-income security, representing the percentage of its face value paid to the holder annually.

Bond Prices

The market value of bonds, which can fluctuate based on changes in interest rates, credit quality of the issuer, and market demand.

Interest Rates

Interest rates are the cost of borrowing money or the reward for saving, typically expressed as a percentage of the principal for a specified period.

S&P Rating

A credit rating given by Standard & Poor's, evaluating the creditworthiness of a borrower, ranging from AAA (excellent) to D (in default).