Little Runabout Inc

question 104

Multiple Choice

Little Runabout Inc.makes small trailers for light-duty towing behind SUVs and small pickup trucks.Its trailers typically sell for $2,500.Many of its customers have asked for credit terms to aid in purchasing the trailers.The firm's finance department has estimated the following profile for its light-duty trailers and customer base: Annual sales: 10,000 trailers
Annual production costs per trailer: $1,500
Lost sales if credit is not provided for customers: 2,000 trailers
Default rate if all customers purchase on credit: 3.00%
What is the profit if the firm has a credit policy?

• A)$25,000,000
• B)$9,250,000
• C)$450,000
• D)$8,000,000

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Definitions:

Natural Monopoly

A market structure where a single supplier efficiently provides all the goods or services due to high fixed or start-up costs, making it impractical for multiple firms to operate.

Long-run Average Costs

The average cost per unit of output when all factors of production - including capital - can be varied, typically showing economies of scale.

Economies of Scale

The economic gains experienced by companies due to their operational scope, with per-unit production costs usually falling as the operational size expands.

Imperfectly Competitive

A market structure where individual sellers have some control over the price due to lack of perfect competition, leading to a variety of prices for similar products.