Question

In each of the following decision situations, explain the trade-offs involved.

            a.         You need to decide whether to buy a used or a new car.

            b.         You are thinking about opening a computer-services business in your basement.

            c.         You are a consultant for the City of Toronto. The city council asks you to analyze the implications of a new high-rise office building downtown.

Answer 1

A.

There is a trade-off between price, longer service life and other benefits that comes with the new car. A new car comes at a higher price and used car comes at a lower price. But, a new car has longer life and brand new model, but used car can have many problems that is not known to the buyer. A new car is with many benefits that comes from the side of the seller, But, these benefits are missing with the used car. there is a problem of information asymmetry between buyer and seller regarding the used car.

B.

There is a trade off between rent of the basement area and the exposure and branding of the business. A basement area comes at a lower rent, but it gives lower exposure and poor branding as well.

C.

There is a trade off between very high cost of acquisition of the land, negatively affecting the business that are in close vicinity of the construction site, and the high benefits received when the space will be sold after in the commercial building. So, in in short run, there is a high investment and in long run, there is a high reward due to the new commercial building in the commercial hub that is downtown.