Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 8: Problem 6

Paolo and Alfredo are twins who both want to open pizza restaurants. Their parents have always liked Alfredo best, and they buy two pizza ovens and give both to him. Unfortunately, Paolo must buy his own pizza ovens. Does Alfredo have a lower cost of producing pizza than Paolo does because Alfredo received his pizza ovens as a gift, while Paolo had to pay for his? Briefly explain.

Short Answer

Expert verified
Receiving the pizza ovens as a gift essentially lowers Alfredo's initial investment, but it does not necessarily mean his overall costs are lower than Paolo's. In considering all costs, including operational, maintenance, and opportunity costs, their total costs of production could end up being very similar.

Step by step solution

01

Observation of the Situation

Alfredo and Paolo are twins planning to open pizza restaurants. Their parents gifted Alfredo two pizza ovens, while Paolo had to buy his own.
02

Cost Assessment for Alfredo

Alfredo received two pizza ovens as a gift. Therefore, the upfront cost of obtaining the ovens for him is zero. However, there are other costs he must consider, such as operational and maintenance costs, as well as the opportunity cost. The opportunity cost is what Alfredo sacrifices in using the ovens for pizza production, rather than for other potential uses.
03

Cost Assessment for Paolo

Paolo had to pay for his pizza ovens, so his upfront cost is more than Alfredo's. Like Alfredo, Paolo also has operational and maintenance costs. Paolo’s opportunity cost, on the other hand, is what he sacrifices by investing in pizza ovens instead of using his money elsewhere.
04

Comparison of costs

Though Alfredo received his pizza ovens as a gift, it does not necessarily mean he will have lower costs than Paolo. Factors such as operational cost, maintenance cost, and opportunity cost should also be taken into account. These costs could be identical for both Alfredo and Paolo, depending on their situation.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

If you deposit \(\$ 20,000\) in a savings account at a bank, you might earn 1 percent interest per year. Someone who borrows \(\$ 20,000\) from a bank to buy a new car might have to pay an interest rate of 6 percent per year on the loan. Knowing this, why don't you just lend your money directly to the car buyer and cut out the bank?

Dane decides to give up a job earning \(\$ 200,000\) per year as a corporate lawyer and converts the duplex that he owns into a UFO museum. (He had been renting out the duplex for \(\$ 20,000\) a year.) His explicit costs are \(\$ 75,000\) per year paid to his assistants and \(\$ 10,000\) per year for utilities. Fans flock to the museum to see his collection of extraterrestrial paraphernalia, which he could easily sell on eBay for \(\$ 1,000,000\). Over the course of the year, the museum brings in revenues of \(\$ 200,000\). a. How much is Dane's accounting profit for the year? b. Is Dane earning an economic profit? Explain.

The principal-agent problem arises almost everywhere in the business world, and it also crops up even closer to home. Discuss the principal-agent problem that exists in the college classroom. Who is the principal? Who is the agent? What potential conflicts in objectives exist between this principal and this agent?

Paolo currently has \(\$ 100,000\) invested in bonds that earn him 4 percent interest per year. He wants to open a pizza restaurant and is considering either selling the bonds and using the \(\$ 100,000\) to start his restaurant or borrowing \(\$ 100,000\) from a bank, which would charge him an annual interest rate of 6 percent. He finally decides to sell the bonds and not take out the bank loan. He reasons: "Because I already have the \(\$ 100,000\) invested in the bonds, I don't have to pay anything to use the money. If I take out the bank loan, I have to pay interest, so my costs of producing pizza will be higher if I take out the loan than if I sell the bonds." Evaluate Paolo's reasoning.

What is the difference between direct finance and indirect finance? If you borrow money from a bank to buy a new car, are you using direct finance or indirect finance?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free