A Star Basketball Player Signs a Contract That Newspaper Reports

question 91

Multiple Choice

A star basketball player signs a contract that newspaper reports indicate is worth $10 million. The player receives $2 million upon signing, and $2 million every year for four years. The contract is worth

• A) less than $10 million since the present value of $2 million received one or more years from now is less than $2 million.
• B) more than $10 million since the present value of $2 million received one or more years from now is more than $2 million.
• C) $10 million as reported in the press.
• D) some amount around $10 million. To determine whether it is more or less than $10 million we need to know whether the interest the player can earn is more or less than the market rate of interest.

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Definitions:

Marginal Cost

The additional total cost incurred from manufacturing an additional unit of a product or service.

ATC

Average Total Cost, which is the total cost of production divided by the quantity of output produced, including both fixed and variable costs.

Marginal Cost

Marginal Cost is the increase in cost resulting from the production of one additional unit of a good.

Break-even Point

The production level where total revenues equals total expenses, and there is neither profit nor loss.