From a transaction cost perspective, discuss why a firm may contract with an investment bank to underwrite or place an issue.
What will be an ideal response?
Investment banks generate their fees from the services they offer, which are generally based on their specialties and the information they possess. The investment bank is able to exploit its specialized knowledge of evaluating the worth of firms and as a result can tell the issuing firm what the securities are worth. It may offer the firm somewhat less than this amount but the firm gets all of the funds immediately and avoids the high cost of waiting and other transaction costs. The investment bank can use its knowledge of what the firm and/or securities are worth and its extensive client base to sell the issue, again exploiting specialized skills and information.
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Suppose that a monopoly is currently producing the quantity at which marginal revenue is less than marginal cost. The monopoly can increase its profit by ________
A) shutting down B) lowering its price and increasing its output C) raising its price and decreasing its output D) lowering its price and decreasing its output
Estimation of the IV regression model
A) requires exact identification. B) allows only one endogenous regressor, which is typically correlated with the error term. C) requires exact identification or overidentification. D) is only possible if the number of instruments is the same as the number of regressors.