In: Economics
Suppose a firm can approach 20 different savers when seeking to acquire financing for a capital expenditure. It costs the firm 1.5 units of the consumption good to meet with each potential lender. The capital expenditure project requires 3,000 units of the consumption good to complete. Alternatively, the firm could go a single bank, at the same cost (1.5 units per loan), to acquire the loan.
a.
Total cost to meet lenders = Cost of each meeting × Number of lenders
= 1.5 × 20
= 30 units
Instead, the firm can acquire the whole 3,000 units from a single bank. In that case the cost is 1.5 units.
Therefore, savings would be the difference.
Savings = Total cost to meet lenders – Total cost to meet a bank
= 30 – 1.5
= 28.5 units (Answer)