When is a firm more likely to engage in excessively risky behaviors, when business is well, or when it is facing financial distress?
What will be an ideal response?
Financial distress is a cause of moral hazard. Even heretofore prudent managers are tempted to take drastic action with the hope that a big payoff might save the company, and the realization that, if the company is about to fail, there's little to lose by taking big risks. Moreover, managers are understandably reluctant to reveal bad news, and the move away from transparency encourages behaviors that would be dismissed as unacceptable if they were easily observable.
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Assume that we are concerned about the existence of one firm (monopoly) in a market because of the potential for economic profits. If, however, there is free entry and exit, should our concerns change? Why or why not?
What will be an ideal response?
France is capital abundant and Italy is labor abundant. Shoes are labor intensive and wheat is capital intensive
Draw diagrams to illustrate the pre- and post-trade equilibria for each of the two countries including the production points, the consumption points, the international price, and the volumes of exports and imports for each. Be sure to identify which country has comparative advantage in which good. Which factors gain and which lose when trade is opened between the two countries? Explain carefully.