If the Price of Just One Input Rises, a Cost-

question 27

Multiple Choice

If the price of just one input rises, a cost- maximizing firm that maintains a constant level of output will use less of the higher- priced input:

• A)if the substitution effect outweighs the output effect.
• B)and all other inputs.
• C)if the output effect outweighs the substitution effect.
• D)in all cases.

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Definitions:

Internal Rate Of Return

A metric used in capital budgeting to estimate the profitability of potential investments, calculated as the discount rate that makes the net present value of all cash flows from a particular project equal to zero.

Required Discount Rate

The minimum expected rate of return on an investment, used in the discounting process of present value calculations.

Profitability Index

A financial tool used to determine the desirability of an investment or project by dividing the present value of future cash flows by the initial investment cost.