What Credit Decision Is Appropriate for a Potential Customer That

question 33

Multiple Choice

What credit decision is appropriate for a potential customer that offers an 80% chance of paying on a $10,000 (present value) sale that has an 80% (present value) cost?

• A)Grant credit since expected profit is $3,200
• B)Grant credit since expected profit is $800
• C)Refuse credit since expected profit is zero
• D)Refuse credit since expected loss is $3,000 Expected profit from offering credit:
• = p x PV(Rev - cost) - (1 - p) x PV(cost)
• = )8 x PV($10,000 - 8,000) - .2 x PV(8,000)
• = PV1,600 - PV1,600

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Definitions:

Pure Monopoly

A market structure where a single seller controls the entire supply of a product or service, and where entry of new competitors is obstructed.

Oligopoly

A market structure characterized by a small number of firms whose decisions about pricing and output can significantly affect competitors.

Mutual Interdependence

The economic concept where the outcome of one party's decision depends on the actions taken by other parties, particularly relevant in oligopolistic markets.

Oligopolistic Firm

A company that operates in an oligopoly, a market structure characterized by a small number of firms dominating the industry.