Tammy Installed a Set of Wind Chimes in Her Backyard

question 50

Multiple Choice

Tammy installed a set of wind chimes in her backyard. She enjoys listening to the musical tones when the breeze hits them. Her neighbor Steven also enjoys the chimes, but her other neighbor Sally hates the constant noise. Tammy's wind chimes:

• A) create a negative externality for Steven and a positive externality for Sally.
• B) are not related to the issue of property rights since all parties are homeowners.
• C) are an example of an efficient market since the benefits to one party are balanced by costs to another party.
• D) are a public good because all three parties can hear the wind chimes.
• E) create a positive externality for Steven and a negative externality for Sally.

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Definitions:

Sunk Costs

Costs that have already been incurred and cannot be recovered, and thus should not factor into the decision-making process for future investments.

Internal Rate of Return (IRR)

A metric used in capital budgeting to estimate the profitability of potential investments, calculated as the discount rate that makes the net present value of all cash flows equal to zero.

Net Present Value (NPV)

A method used in capital budgeting to assess the profitability of an investment or project by calculating the difference between the present value of cash inflows and outflows.

Capital Cost Allowance (CCA)

A yearly deduction or depreciation on the cost of certain assets that can be claimed for tax purposes in Canada.