Tom and Jerry Have Two Tasks to Do All Day

question 11

Multiple Choice

Tom and Jerry have two tasks to do all day: set traps and build bombs.If Tom spends all day setting traps,he will have set 16 traps.If he instead devotes his day to building bombs,Tom will build 4 bombs.If Jerry spends his day setting traps,he will set 14 traps;if he spends the day building bombs,he will build 7 bombs.Because Tom has a ____________ opportunity cost for one bomb compared to Jerry,we know Tom has _________________________.

• A)higher;the comparative advantage in bomb production
• B)lower;the comparative advantage in bomb production
• C)similar;no advantage in production of either good
• D)higher;the comparative advantage in trap production

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Definitions:

Marginal Tax Rate

The tax rate applied to an additional dollar of income, representing the rate at which your next dollar of income will be taxed.

Cost Of Debt

The effective rate that a company pays on its total debt, indicating the average return that lenders demand for borrowing their capital.

Capital Structure

Capital structure refers to the mix of equity, debt, and other financing sources a company uses to fund its operations and growth.

Optimal Capital Structure

The best combination of debt, preferred, and equity financing that maximizes a company’s stock price by minimizing its cost of capital.