You will use this information for the next four questions. Jake bought a motorbi

Question

You will use this information for the next four questions.

Jake bought a motorbike in 2011 for $1500. Since then, he's made $200 in repairs and improvements on it. He has now decided to sell the motorbike, and he has two options:

1) He could sell the motorbike as-is. His research reliably indicates that he could get $1800 for the motorbike.
2) He could make $350 more in improvements and then sell the motorbike. His research reliably indicates that if he makes these improvements first, he could get $2240 for it.

In this case, the marginal cost of making the repairs is:

Explanation / Answer

Option 1

Jake will get $1800 in this option from sale of Motorbike.

Option 2

Net proceeds for Jake in this option will be = $2240 - $350

= $1890

Conclusion: As it is clear that option 2nd has generated more cash, Jake should repair and then sell the bike.

Thus, the marginal costs of repairs in this case are $350 only (As $200 have already been incurred).

Answer is $350

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