A Meditation Class Meets on the Second Floor of a Building;

question 114

Multiple Choice

A meditation class meets on the second floor of a building; the first floor is a nightclub. The loud music from the club disturbs the classes. The club could be soundproofed for a cost of $5,000 or move at a cost of $8,000. The class cannot be soundproofed enough to overcome the music, but could be moved for $4,000. According to the Coase theorem, _____.​

• A)the club should be soundproofed so both businesses can stay open
• B)the club should be soundproofed because it is the one generating the externality​
• C)the club should move rather than be soundproofed because eliminating an externality is better than compensating for it​
• D)the class should move because it can eliminate the externality at a lower cost than can the nightclub​
• E)whichever business has been there longer has a property right and the other should adjust​

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Definitions:

Cost Allocation

The distribution or assignment of indirect, common, or joint costs to different departments, processes, or products within an organization.

Step-Down Method

A cost allocation method used in accounting that allocates overhead costs to cost objects in a sequence, where each department allocates its costs to other departments based on a predetermined order.

Allocation Sequence

The order or process by which costs or resources are distributed among various departments or projects.

Service Departments

Units within an organization that support other departments but do not directly contribute to the production of goods or delivery of primary services.