Question

5 A sudden rise in the market demand in a competitive industry leads to A short run market equilibrium price higher than the original equilibrium price A short run economic profit Entry of new firms into the market All of the above A sudden decrease in the market demand in a competitive industry leads to losses in the short-run and average profits in the long-run above average profits in the short-run and average profits in the long-run new firms being attracted to the industry demand creating supply 7 The concept of mean reversion is defined by the tendency of accounting profits to revert to zero the tendency of costs to revert to zero the tendency of economic profits to revert to zero the tendency of profits to revert to negative 8 The indifference principle states that: If an asset is mobile, then in the long run, it will be indifferent about where it is used In the long run, a mobile asset will make the same profit, no matter where it goes If an asset is mobile, then in the long run, it would stay with the first user Only A&B 10 An investor has to choose between stocks A&B, each selling for $10. Stock A, can either increase in price to $12, with a 50% probability or stay at $10 with a 50% probability. Stock B can either increase in price to $15 with a 50% probability or go down to $7 with a 50% probability. Which of the stocks would the investor choose? Stock A Stock B None of the stocks The investor would exit the market

Answer 1

1) Solution: all of the above

Explanation: With sudden rise in the demand, prices in the industry will increase; and resulting to higher profits which attract new firms to enter in the industry

　

2) Solution: losses in the short-run and average profits in the long-run

Explanation: In a competitive industry sudden fall in the market results to losses in the short-run however average profits in the long-run

　

3) Solution: the tendency of economic profits to revert to zero

Explanation: Mean reversion states that the stocks that have had low returns in the past have high probability to perform well in the future

　

4) Solution: Only A & B

Explanation: When the asset is mobile, and then in the long duration would be indifferent in regard to where it is used; and earn similar profit, no matter where it goes