Should Credit Be Granted to a Customer Wishing to Purchase

question 2

Multiple Choice

Should credit be granted to a customer wishing to purchase a $2,000 item that has been marked-up 50% over cost if the probability of collection is only 65%? Assume all cash flows are discounted to present value.

• A)No; the expected loss is $33.33
• B)No; the expected loss is $150.00
• C)Yes; the expected profit is $33.33
• D)Yes; the expected profit is $150.00 expected profit = .65($2,000 x (50/150)) - .35($2,000 x (100/150))
• = )65($666.67) - .35($1,333.34)
• = $433.34 - $466.67

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Definitions:

Regulatory Capture

A situation where regulatory agencies are dominated by the interests of the industries they are charged with regulating, often leading to biased and ineffective regulation.

Negative Externalities

Costs that are not reflected in the market price, caused by the production or consumption of goods and services, and borne by society rather than the producers or consumers.

Earmarks

Provisions within legislation that allocate specific funds to certain projects, often without a competitive bidding process.

Federal Government Legislation

Laws and regulations created and enacted by the national government of a country.