Larry Was Accepted at Three Different Graduate Schools, and Must

question 82

Multiple Choice

Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry has decided to go to Elite U. Assuming that all of the values described are correct, for Larry to decide on Elite U, he must have:

• A) calculated his surplus from each choice and picked the one with the highest surplus.
• B) underestimated the benefits of attending No Name.
• C) miscalculated the surplus of attending Elite U.
• D) determined the opportunity cost of each choice and picked the one with the lowest opportunity cost.

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Definitions:

Fixed Costs

Costs that do not vary with the level of production or sales, including expenses like rent, salaries, and insurance.

Variable Costs

Expenses that change in proportion to the activity of a business, such as utility bills that increase with production volume.

Cash Break-Even

The sales level where operating cash flow is equal to zero.

Fixed Costs

Fixed costs are business expenses that remain constant regardless of the level of production or sales, such as rent, salaries, and loan payments.