Stella Ann Freeman Name Course Instructor Date MBA 540 Mid-term Exam 1. (10 pts.) Stella Ann Freeman is having a difficult time deciding whether or not to purchase a new car. How would understanding the concept of opportunity costs help her make a decision? Opportunity cost relates to the cost of foregoing an alternative. The opportunity cost in the case for buying the new car is using the money to purchase another commodity or paying for a home, vacation. At the same time, Stella will give up the opportunity to increase her savings in the future. As such, she remains to have less money to invest, since it goes into consumption (buying the new vehicle). Stella also needs to take into account the cost implication of the new vehicle through maintenance, and this is potentially a loss in investment, if the car is for personal use only. Stella has to decide whether to give up the car, or buy and use it partially for business or collateral, and when there is utility maximization then Stella will have satisfied her needs. 2. (10 pts.) Referring to the table below, hiring a driver costs $10. Each machine costs $100. Which method should he use and why?
DriversDriverMachinesMachine Totalcosts (@10)costs (@100)Method 1202001010001200Method 2505002200700Method 31001000001000Method 4101001212001300 Even though, method 2 results to the lowest cost at $ 700, the most optimal option is met