A Firm Has Invented a New Beverage Called Slops

question 69

Multiple Choice

A firm has invented a new beverage called Slops. It doesn't taste very good, but it gives people a craving for Lawrence Welk's music and Professor Johnson's jokes. Some people are willing to pay money for this effect, so the demand for Slops is given by the equation q = 10 - p. Slops can be made at zero marginal cost from old-fashioned macroeconomics books dissolved in bathwater. But before any Slops can be produced, the firm must undertake a fixed cost of $30. Since the inventor has a patent on Slops, it can be a monopolist in this new industry.

• A) The firm will produce 5 units of Slops.
• B) The firm will produce 10 units of Slops.
• C) From the point of view of social efficiency, it is best that no Slops be produced.
• D) A Pareto improvement could be achieved by having the government pay the firm a subsidy of $35 and insisting that the firm offer Slops at zero price.
• E) None of the above.

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Definitions:

Straight-Line Depreciation

is a method of allocating the cost of a tangible asset over its useful life in equal annual amounts.

Incremental Sales

The additional revenue generated from a specific business action or decision.

Cash Operating Expenses

Expenditures that a company makes in cash for the day-to-day running of its business.

Capital Budgeting

The process of planning and managing a company's long-term investments in assets and projects based on their potential to generate earnings and cash flow.