Suppose There Are Ten People Playing Cards in a Room

question 45

Multiple Choice

Suppose there are ten people playing cards in a room.One of them wants to smoke a cigar;nine of them dislike the smell of cigar smoke.The smoker values the privilege of smoking at $5,and each of the other nine occupants of the room would be willing to pay fifty cents for clean air in the room.The rules governing use of the room state that smoking is not allowed unless everyone agrees to allow smoking.
Refer to the information given above.If the rules governing the room instead stated that smoking is allowed unless everyone in the room agrees to prohibit it:

• A)the non-smoking occupants will pay the cigar smoker to not smoke.
• B)the cigar smoker will smoke and not have to pay the other occupants for the external cost.
• C)the cigar smoker will smoke,and will pay each other occupant 50 cents.
• D)the parties may or may not be able to reach a negotiated agreement depending on the bargaining strength of each.

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Definitions:

Break-even Point

The level of production or sales at which costs equal revenues, and there is no profit or loss.

Break-even Point

The point at which total costs equal total revenues, meaning no profit or loss is being made.

Contribution Margin Ratio

A financial metric that shows what percentage of sales revenue is available to cover fixed costs and generate profit.

Variable Costs

Costs that change in proportion to the level of activity or volume of production, such as raw materials and labor expenses.