To Open a New Business,a Manager Must Obtain a License

question 35

Essay

To open a new business,a manager must obtain a license from the city for $20,000.The license is transferable,but only $3,000 is refundable in the event the firm does not use the license.
a.What are the firm's fixed costs?
Sunk costs?
b.Suppose the manager obtains a license but then decides against opening the business.If another firm offers the manager $2,000 for the license,should the manager accept the offer?

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Definitions:

Expected Return

The weighted average of all possible returns for an investment, with weights being the probabilities of each outcome.

Standard Deviation

A statistical measure of the dispersion of returns for a given security or market index, indicating how much returns can deviate from the average return.

Correlation

A statistical measure indicating the degree to which two variables' movements are associated with each other, ranging from -1 (perfect negative correlation) to 1 (perfect positive correlation).

Time Diversification

An investment strategy that spreads exposure across different periods to reduce risk associated with market volatility.