What is meant by the term "optimization"? What do economists usually believe about how individuals optimize?
What will be an ideal response?
Choosing the best option from a set of feasible alternatives is referred to as optimization. Whatever choice a person faces, economists believe that he or she is likely to try to choose optimally. Economists don't assume that people always successfully choose the best feasible option, but that people try to do so and usually do a good job with whatever potentially limited information they have. This doesn't mean that people are always perfect calculators. Instead, economists believe that people's behavior is only approximated by optimization. In other words, they believe that an agent's actual choice will sometimes differ from that person's optimal choice.
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The quantity theory asserts that real GDP is
A) not influenced by the quantity of money. B) never different from potential GDP. C) equal to nominal GDP multiplied by the quantity of money. D) equal to nominal GDP divided by the quantity of money.
A stock option is said to be "out of the money" if:
A) the strike price equals the exercise price. B) stock price equals the strike price. C) strike price exceeds the stock price. D) stock price exceeds the strike price.
Fresh Flour makes baking flour and sells its flour in 4 pound sacks or bags. The managers of Fresh Flour are considering whether the firm should make or buy the flour sacks. To make the sacks, Fresh Flour needs a $500,000 piece of equipment. Using this equipment, Fresh Flour can make a flour sack for $0.01 and, for simplicity, ignore taxes and assume that the $0.01 cost includes depreciation and
all other costs. Fresh Flour would finance the $500,000 investment using its own funds and, if it purchased the flour sacks from another firm, it would pay $0.19 a flour sack. The life span of the equipment is 10 years and it has no salvage value at the end of the ten years. If the discount rate is 6 percent and the firm needs 400,000 flour sacks a year, what is the net present value of the equipment? A) -$28,126 B) $31,520 C) $29,926 D) -$45,852
Purchasing power parity exists when domestic currency
A. buys as many goods abroad as at home. B. buys more goods at home than abroad. C. is not convertible to a foreign currency. D. maintains a fixed exchange rate with a foreign currency.