A Manager Is Comparing the Total Maintenance (Preventive Plus Breakdown)

question 111

Multiple Choice

A manager is comparing the total maintenance (preventive plus breakdown) cost curves for two scenarios. The graphs have maintenance commitment on the x-axis and costs on the y-axis. Scenario A includes the direct breakdown maintenance costs, while Scenario B includes the "full" (direct and indirect) breakdown maintenance costs. Which of the following should the manager notice when going from Scenario A to Scenario B?

• A) Total cost is decreased.
• B) Optimal point is moved to the left.
• C) Optimal point is moved to the right.
• D) Preventive maintenance cost slope is increased.
• E) None of these

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Definitions:

Slutsky Equation

Formula for decomposing the effects of a price change into substitution and income effects.

Substitution Effects

The economic understanding that as prices rise or income decreases, consumers will replace more expensive items with less costly alternatives.

Income Effects

Changes in consumer's purchasing power and consumption patterns resulting from changes in income.

Marginal Rate of Substitution

The rate at which a consumer is willing to give up one good in exchange for another good while maintaining the same level of utility.