If diversification is such a good idea for a saver, why do so many people put a lot of their savings in the same bank?
What will be an ideal response?
The answer lies in the fact that the bank itself provides diversification. For example, if a saver has $10,000, and wants to earn a return, he or she could loan the entire amount to one borrower. This is not good diversification since the borrower may default. On the other hand, the saver could place the $10,000 in one bank that makes, say, 1,000 equal sized loans. Now the saver finds that he or she has $10 in each of these loans. This is good diversification and the saver obtains it at very low transactions cost.
You might also like to view...
Firms that emit toxins into the air:
a. underproduce because the private cost of production exceeds the social cost. b. overproduce because the social cost of production exceeds the private cost. c. produce the same as nonpolluting firms. d. produce at the socially optimal amount.
Compared to a negative income tax, the federal personal income tax is thought of as a way to promote greater equality. Why?
What will be an ideal response?
Dividends
A) raise after tax net income. B) are not tax deductible. C) are tax deductible. D) have the same tax treatment for the firm as the tax treatment of interest payments.
The organization of petroleum exporting countries (OPEC) is an example of a(n)
A) oil monopoly B) cartel C) competitive arrangement D) prisoner's dilemma