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Starbucks has $1 billion to invest. It can either purchase a rival coffee shop chain or build additional Starbucks shops. If Starbucks chooses to purchase the rival chain, what does that say about the relative profitability of purchasing and owning the rival's existing shops versus building additional Starbucks shops? Explain.

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jepessoa

Answer:

Investment decisions are made on the margin. This means that Starbucks' executives calculated that purchasing the rival coffee chain would yield a higher marginal return for every dollar invested than opening more of their own Starbucks shops. The investment that yields the highest marginal return per dollar investment will be made.

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