Suppose a saver is looking for the opportunity to make a very large return in a very short period of time. Would you recommend diversification for this individual?
What will be an ideal response?
An individual looking to make a very large return in a short period of time will not likely benefit from diversification. As we saw from the chapter one of the benefits of diversification is the reduction in risk that results. But another lesson was that the lower the risk the lower the return. If an individual is interested in a large, short-term return he/she is going to have to be willing to accept a larger risk. In this case the individual is more likely to want to concentrate on one or two assets (or gambles) and put all of his/her eggs in that basket and hope for the best. If it turns out well the actual return is likely to be higher than it would have been under a diversification strategy, however, he/she is more likely to lose using this approach as well. So while the expected return may be the same, without diversification the risk is far greater which is why the actual return could be larger.
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Refer to Table 18-4. The table above outlines the rankings of three members of the U.S. House of Representatives on three spending alternatives
Assume that Congress can spend additional revenue on only one of the three spending alternatives and that Tom, Dick, and Harriet, all members of the House of Representatives, participate in a series of votes in which they are to determine which of the spending alternatives should receive funding. Three votes will be taken: (1 ) Foreign Aid and Post-Secondary Education (2 ) Foreign Aid and Roads and Bridges and (3 ) Post-Secondary Education and Roads and Bridges. Determine whether the voting paradox will occur as a result of these votes.
Pork from pigs can be used to produce bacon or sausage, but not both. If the price of bacon rises for some reason, then, everything else equal: a. the price of sausage will rise
b. the price of sausage will fall. c. the resources used to raise pigs will become less expensive. d. the demand for bacon will decrease.
The Consumer Price Index (CPI)
a. measures the prices of all goods produced in the economy b. includes prices of raw materials c. is found by averaging the prices of all goods consumed in the economy d. includes only the prices of domestically produced consumer goods e. includes the prices of some used consumer goods
If a firm experiences constant returns to scale at all output levels, then its long-run average total cost curve would
a. slope downward. b. be horizontal. c. slope upward. d. slope downward for low output levels and upward for high output levels.