Boyd Manufacturing operates in a perfectly competitive market. The firm recently purchased a new structure with an expected rate of return of 18 percent
If the market rate of interest is 10 percent, was the firm's decision to purchase the structure a wise one? Explain.
Yes. A perfectly competitive firm should keep investing in capital up to the point where the expected rate of return is equal to the interest rate. In this case, the expected rate of return on the investment is higher than the market rate of interest. This implies that the opportunity cost of the funds used to purchase the structure is lower than the expected revenues from the structure. Thus, it was a good decision.
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An industry is characterized by scale economies, and exists in two countries. Should these two countries engage in trade such that the combined market is supplied by one country's industry, then
A) consumers in both countries would have more varieties and lower prices. B) consumers in both countries would have higher prices and fewer varieties. C) consumers in the importing country only would have higher prices and fewer varieties. D) consumers in the exporting country only would have higher prices and fewer varieties. E) consumers in both countries would have fewer varieties at lower prices.
Adverse selection is a problem associated with equity and debt contracts arising from
A) the lender's relative lack of information about the borrower's potential returns and risks of his investment activities. B) the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults. C) the borrower's lack of incentive to seek a loan for highly risky investments. D) the lender's inability to restrict the borrower from changing his behavior once given a loan.