How could return-chasing explain why many of Enron's employees lost most of their retirement savings when Enron went bankrupt?
What will be an ideal response?
Return-chasing occurs when people invest in assets that have realized a high rate of return in the past. Return-chasing explains why many of Enron's employees chose to forgo the benefits of diversification and invested the overwhelming majority of their retirement savings in Enron stock. Enron stock had gone up by a factor of 10 in the decade before Enron went bankrupt—that's a 1,000 percentreturn. This led Enron employees to mistakenly believe that Enron stock was a great investment for the future. Consequently, employees allocated more and more of their contributions to employer stock, under the assumption that Enron stock prices would continue to increase in the future.
A-head: EVIDENCE-BASED ECONOMICS: DO INVESTORS CHASE HISTORICAL RETURNS?
Concept: Return chasing
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How can compensating differentials explain differences in wages across jobs in different industries?
What will be an ideal response?
Suppose that fundamental analysis indicates a particular company's stock is overvalued
a. This means its present value is less than its price. You should consider adding the stock to your portfolio. b. This means its present value is less than its price. You shouldn't consider adding the stock to your portfolio. c. This means its present value is more than its price. You should consider adding the stock to your portfolio. d. This means its present value is more than its price. You shouldn't consider adding the stock to your portfolio.
In the short run, the profitability of monopolistic competition _______ that of perfect competition; in the long run the profitability of monopolistic competition _______ that of perfect competition.
Fill in the blank(s) with the appropriate word(s).
When price equals marginal cost
A) firms make zero profits. B) firms make positive profits. C) the industry is in long-run equilibrium. D) the marginal benefits of consuming an extra unit of the good exactly equals the marginal cost to society of producing the good.