Table 17-1 Imagine a Small Town in Which Only Two Residents, Rochelle

question 232

Multiple Choice

Table 17-1
Imagine a small town in which only two residents, Rochelle and Alec, own wells that produce safe drinking water. Each week Rochelle and Alec work together to decide how many gallons of water to pump. They bring the water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Rochelle and Alec can pump as much water as they want without cost so that the marginal cost of water equals zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below:

-Refer to Table 17-1.If the market for water were perfectly competitive instead of monopolistic,how many gallons of water would be produced and sold?

• A) 0
• B) 600
• C) 900
• D) 1,200

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Definitions:

MM

Often refers to Modigliani-Miller propositions, theoretical principles in corporate finance regarding capital structure irrelevance in perfect markets.

Debt Financing

Debt financing involves raising capital through borrowing money that must be repaid over time, typically with interest, from external sources like banks or through issuing bonds.

Bankruptcy Costs

Expenses associated with the process of declaring and handling bankruptcy, including legal fees, administrative fees, and potential losses to creditors.

Miller and Modigliani

Refers to the theorem proposed by Franco Modigliani and Merton Miller, indicating that under certain market conditions, the valuation of a company is unaffected by its capital structure.