Final answer:
Direct costs are easier to measure in financial distress situations due to their tangible nature, involving exact cash outlays, whereas indirect costs are harder to quantify as they often involve intangible effects. The correct answer is option: a) direct costs are easy to measure.
Step-by-step explanation:
When considering the costs associated with financial distress, it is generally understood that direct costs are easier to measure. Direct costs, such as legal and administrative expenses, can be quantified more readily because they involve actual cash outlays that are often recorded as the firm undergoes reorganization or bankruptcy proceedings.
In contrast, indirect costs are far more challenging to measure as they include the impacts of financial distress on areas like company reputation, employee morale, or customer loyalty, which are intangible and do not necessarily involve direct cash transactions. Hence, measuring indirect costs often involves estimations and assumptions rather than precise calculations.
Breaking down total costs into categories such as fixed cost, marginal cost, average total cost, and average variable cost provides valuable insights to a firm because it allows for the analysis of cost behavior related to production and operations.
However, issues like the free rider problem, recidivism, or the need to analyze the benefit-cost ratio are distinct and pertain to broader economic and social science considerations, which are not directly related to the question of measuring costs in financial distress.