Suppose the stocks for two relatively identical auto makers, A and B, are selling for $100 and $150 respectively. Both are predicted to sell for $200 in the coming year. What action do you expect investors engaging in arbitrage to take? What will be the ultimate effect of this action?
What will be an ideal response?
Investors will realize that company A earns a rate of return of 50% while company B only earns a return of 33.3%. Investors will sell off shares of B stock and purchase shares of A to take advantage of the profit differential. Eventually, however, these sales and purchases will cause the price of company A stock to increase and the price of company B stock to decrease to a point where both prices are equal and investors are indifferent between purchasing either stock.
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a. True b. False Indicate whether the statement is true or false
The tragedy of the commons is a widely used model often referred to in discussions about
a. space and ocean exploration. b. lack of scientific research. c. air and water pollution. d. shared natural resources.
The law of increasing opportunity cost indicates that the production possibilities curve has a constant slope.
a. true b. false
A rise in the price level has a direct effect on spending because
A) the real value of the money people have decreases and they can buy less with it. B) a higher price gives people more money, and so the more goods and services they can buy. C) the real value of the money people have varies directly with the price level. D) people like to spend more when prices are higher.