A McDonald's Big Mac Value Meal Consists of a Big

question 56

Multiple Choice

A McDonald's Big Mac value meal consists of a Big Mac Sandwich,Large Coke,and a Large Fry.Assume that there is a competitive market for McDonald's food items and that McDonald's sells the Big Mac value meal for $4.79.Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on one extra value meal?

• A)Yes,buy extra value meal and then sell Big Mac,Coke,and Fries to make arbitrage profit of $0.68.
• B)No,no arbitrage opportunity exists.
• C)Yes,buy Big Mac,Coke,and Fries then sell value meal to make arbitrage profit of $1.09.
• D)Yes,buy Big Mac,Coke,and Fries then sell value meal to make arbitrage profit of $0.68.

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Definitions:

Fixed Costs

Expenses that do not change in proportion to the activity of a business, such as rent, salaries, and insurance premiums.

Variable Cost

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

Fixed Costs

Costs that remain constant regardless of how much is produced or sold, including expenses like rent, salaries, and insurance.

Net Income

The amount of profit that remains after all operating expenses, taxes, and costs have been subtracted from total revenue, essentially the bottom line.