Adverse selection in insurance requires that
a. all people face the same risk
b. potential customers facing more risk are more interested in purchasing insurance
c. people are not risk averse
d. insurers can tell higher risk people from lower risk people
QUESTION 2For the practice of price discrimination to be successful, the monopoly must:
a. be able to prevent resale of its product.
b. face similar demand curves for various markets.
c. have similar costs among markets.
d. have a downward sloping marginal cost curve.
QUESTION 3In the constant-growth dividend valuation model, the required rate of return on common stock (i.e., cost of equity capital) can be shown to be equal to the sum of the dividend yield plus the ____.
a. yield-to-maturity
b. present value yield
c. risk-free rate
d. dividend growth rate
e. none of the above
QUESTION 4Adverse selection in insurance requires that
a. potential customers face different levels risk
b. potential customers facing more risk are no more interested in purchasing insurance
c. people are not risk averse
d. insurers can tell higher risk people from lower risk people
QUESTION 5The deadweight loss from a monopoly refers to:
a. the portion of a monopolist's profits that are above the competitive profit level.
b. the increase in price due to the monopolization of a market.
c. the inefficient use of factors of production by a monopoly.
d. the loss of consumer surplus due to the monopolization of a market that is not transferred to another economic actor.
QUESTION 6The weights used in calculating the firm's weighted-average cost of capital are equal to the proportion of debt and equity ____.
a. used to finance the project
b. used to finance the projects undertaken last year
c. in the industry average capital structure
d. in the firm's target capital structure
e. none of the above
QUESTION 7Adverse selection is
a. when people act differently because they are insured
b. when more risk averse people want to be insured more
c. when people at greater risk want to be insured more
d. when your guess at a test question is wrong
QUESTION 8If a monopoly is maximizing profits:
a. price will always be greater than average cost.
b. price will always equal marginal cost.
c. price will always be greater than marginal cost.
d. price will always equal marginal revenue.
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