Comment on the following statement: "When a negative externality is present, and a firm does not factor the additional social cost into its decisions, the firm is likely to produce a level of output that is lower than the efficient level."
What will be an ideal response?
The statement is false. When a negative externality is present, the true marginal cost of producing the good is higher than the marginal cost the firm bears. Firms in perfect competition will produce where price is equal to marginal cost (that the firm bears). Thus, the firm is producing a level of output for which the true cost (private + external cost) is greater than the price. This means that the level is output is greater than the efficient level of output.
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Tying the salaries of top managers to the firm's stock price or to the profitability of the firm allows a firm's board of directors to
A) avoid disclosing financial statements to investors. B) eliminate moral hazard. C) increase asymmetric information. D) reduce the principal-agent problem.
International data suggests that
a. convergence is not taking place. b. convergence is taking place among poor countries but not among rich countries. c. convergence is taking place among all countries. d. convergence is taking place among rich countries but not among poor countries.
Liquidity is:
A. a measure of how easily a particular asset can be converted quickly to cash without much loss of value. B. the speed with which dollars are spent in the economy. C. the speed with which physical dollars change hands in the economy. D. the magnitude of change in the money supply as controlled by the Fed.
Why would a candidate for political office speak in general instead of specific terms?
A) Because he or she believes voters want to hear generalities, not specifics. B) Because he or she believes voters are too busy to listen to specifics. C) Because he or she believes that specifics are too likely to label him or her as a member of an extreme-wing, and politically this would be undesirable. D) Because it is cheaper to get the message out if it is worded in general instead of specific terms.