1. Pookie\'s Pinball Palace restores old Pinball machines. Pookie has just spent
ID: 1162493 • Letter: 1
Question
1. Pookie's Pinball Palace restores old Pinball machines. Pookie has just spent S300 purchasing and cleaning a 1960s-era machine which he expects to sell for $2,000 once he is finished with the restoration. After having spent S300, Pookie discovers that he will need to rewire the entire machine at a cost of $1,100 in order to finish the restoration. Alternatively, he can sell the machine "as is" now for $1,000. a) What is his marginal benefit if he sells the b) What is the marginal cost of completing the c) Should he sell the machine now, or finish the machine "as is" now? task? restoration first and then sell it?Explanation / Answer
ans.
a) Pookie has spent $300 in buying and cleaning the machine. The machine now, without restoration can be sold for $1000. Hence the marginal benefit now on selling is the difference of sale price and cost price which is 1000 - 300 = $700
b) Marginal cost is the additional cost incurred which would be the cost of restoration. Hence it is $1100.
c) If he sells the machine now, he gets a marginal benefit of $700. If he spends 1100 on restoration his cost rises to 1400 and he receives 2000 so his benefit is $600. Hence it is more profitable to sell now without restoration.
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