Suppose you are risk averse and you are deciding between two investments. One has a guaranteed return of 5% while the second has a 50% chance of a 10% return and a 50% chance of a 0% return. Which investment would you choose? Why?
What will be an ideal response?
The second investment has an expected return of (0.5 × 10%) + (0.5 × 0%) = 5%. Since the two investments have the same expected return and you are risk averse, you choose the first investment.
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The law of diminishing marginal product holds so long as the input is not a Giffen good.
Answer the following statement true (T) or false (F)
The market for used cars is shown in the above figure. Buyers cannot tell whether any given car is a lemon. The percent of all cars that are lemons is ?. What value of ? is necessary for all cars to be sold?
What will be an ideal response?
Ignoring the government and foreign sectors, there is an unplanned decrease in inventories of $200 billion at the current level of real national income of $12 trillion. From this information, we know that
A) saving equals $200 billion. B) consumption expenditures equal $12 trillion less saving less $200 billion. C) planned investment is $200 billion more than planned saving. D) planned investment is $200 billion less than planned saving.
What happens to total revenue associated with a linear demand curve as price falls?
What will be an ideal response?