Explain what an asset bubble is, when an asset bubble would form, and why the bubble will eventually burst
What will be an ideal response?
An asset bubbles refers to a situation in which the price of an asset rises well above the asset's fundamental value, and the increase in price is unsustainable. Bubbles typically form when investors become overly optimistic about the returns they are likely to receive from owning an asset, resulting in increased purchases of the asset which drives up the price. Eventually, some investors begin to doubt that the price of the asset will continue to rise and begin to sell the asset, causing the price to fall.
You might also like to view...
A positive externality clearly occurs when
A) a person behaves in the public interest. B) a person's action unintentionally benefits other people. C) a person behaves only with courtesy and social grace. D) a person couldn't care less about anybody else.
Suppose the demand for Pepsi-Cola is qp = 54 - 2pp + 1pc. The demand for Coca-Cola is qc = 54 - 2pc + 1pp. Each firm faces a constant marginal cost of zero. Determine the Bertrand equilibrium prices. What happens to the Bertrand equilibrium prices and profits if increased differentiation causes the demand for Pepsi-Cola to become qp = 104 - 2pp + 1pc while the demand for Coca-Cola remains
unchanged? What will be an ideal response?