Constantine Purchased 100 Shares of IBM Stock Several Years Ago

question 103

Multiple Choice

Constantine purchased 100 shares of IBM stock several years ago for $150 per share. The price of these shares has fallen to $55 per share. Constantine's investment strategy is "buy low, sell high." Therefore, he will not sell his IBM stock until the price rises above $150 per share. If he sells at a price lower than $150 per share he will have "bought high and sold low." Constantine's decision:

• A) is correct and shows a solid command of the nature of opportunity cost.
• B) is incorrect because the original price paid for the shares is a sunk cost and should have no bearing on whether the shares should be held or sold.
• C) is incorrect because when the price of a stock falls, the law of demand states that he should buy more shares.
• D) is incorrect because it treats the price of the shares as an explicit cost.

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