Contractor A is negotiating to build a warehouse for Firm B to be completed in 75 days. Contractor A's estimated cost is $200,000. Pushing back the completion date by 15 days would allow it to reduce its cost by $30,000. The value to Firm B of the warehouse is $250,000 if completed in 75 days and $235,000 if completed in 90 days. A mutually beneficial, efficient deal:
A) means completion of the warehouse construction in 90 days at a price greater than $235,000.
B) means completion of the warehouse construction in 90 days at a price between $170,000 and $235,000.
C) is not possible as there is no zone of agreement.
D) means completion of the warehouse construction in 75 days at a price between $200,000 and $250,000.
E) is possible only if contractor A agrees to build the warehouse in 75 days.

Question

Quizplus · Accepted Answer

A mutually beneficial, efficient deal means that both Contractor A and Firm B come to an agreement where they both benefit. In this scenario, Contractor A can reduce its cost by $30,000 if the completion date is pushed back by 15 days. This means that the new cost to Contractor A would be $170,000 ($200,000 - $30,000).

Firm B values the warehouse at $250,000 if completed in 75 days and $235,000 if completed in 90 days. Therefore, in order to come to a mutually beneficial agreement, Contractor A would need to offer a price between $170,000 and $235,000 to complete the warehouse in 90 days.

If Contractor A agrees to complete the warehouse in 75 days, then the price range would be between $200,000 and $250,000, but this may not be the most efficient solution for both parties.

Therefore, choice B is the best option where completion of the warehouse construction in 90 days at a price between $170,000 and $235,000 is a mutually beneficial, efficient deal.

Contractor a Is Negotiating to Build a Warehouse for Firm