When Resources Are Misallocated, or Allocated Inefficiently

question 104

Multiple Choice

When resources are misallocated, or allocated inefficiently,

• A) market failure occurs.
• B) then there must be external costs or benefits in production.
• C) then it must be the case that there is imperfect information in the market.
• D) then it must be the case that the good is a public good.

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Definitions:

After-Tax Income

The amount of income an individual or corporation retains after all applicable taxes have been deducted.

Depreciation

The accounting process of allocating the cost of a tangible asset over its useful life, reflecting wear and tear or obsolescence.

Net Cash Flow

Net cash flow is the total amount of money being transferred into and out of a business, particularly in reference to the amount of liquidity.

Economic Value Added (EVA)

A method used to measure a firm’s true profitability. EVA is found by taking the firm’s after-tax operating profit and subtracting the annual cost of all the capital a firm uses. If the firm generates a positive EVA, its management has created value for its shareholders. If the EVA is negative, management has destroyed shareholder value.