Westerlund Owns a Picture-Framing Shop,The Caplow Co

question 3

Multiple Choice

Westerlund owns a picture-framing shop,The Caplow Co.The average price she receives for a picture she frames for a customer is $120.This price must cover her costs for a typical framed picture,which consists of $5 for glass,$2 for matting,$13 for the frame,and $30 for the labor involved.She must also cover monthly expenses of $1,000 for rent and insurance,$200 for heat and electricity,$500 for advertising,and $3,500 for her salary.Assuming there is no change in price or the quantity demanded,if Westerlund wants to increase her advertising expenses to a total of $1,000 (a $500 increase) ,this would cause total costs to __________ and the break-even quantity to __________.

• A) decrease; stay the same
• B) increase; increase
• C) decrease; increase
• D) stay the same; increase
• E) stay the same; decrease

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Definitions:

Initial Capital Requirements

The amount of funds required to start a business, covering costs such as land, buildings, equipment, inventory, and working capital.

Assets

Any resource that a business owns and expects to use to its benefit.

Borrowed Funds

Funds obtained through loans or credit, not from direct earnings or investments.

Leverage

The ability to finance an investment through borrowed funds, increasing both the potential for return and the level of risk.