The Default Rate of Don's New Customers Has Been Running

question 85

Multiple Choice

The default rate of Don's new customers has been running at 20%.The average sale for each new customer amounts to $500,generating a present value of profit of $200 and a 30% chance of a second order next year.The default rate on second orders is only 5%.If the interest rate is 6%,what is the expected profit from each new customer?

• A)$152.50
• B)$149.53
• C)$275.00
• D)$139.62

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Definitions:

Revenue

The total amount of money generated by the sale of goods or services before any costs or expenses are deducted.

Unit Price Elastic

A condition where a change in the price of a good or service has a proportional change in the quantity demanded or supplied.

Quantity Demanded

The overall quantity of a product or service that customers are ready to buy at a particular price during a defined timeframe.

Normal Good

A normal good is a type of good for which demand increases when income increases, and falls when income decreases but price remains constant.