In Order for a Firm to Produce High Quality Goods

question 8

Multiple Choice

In order for a firm to produce high quality goods in an asymmetric information market with high and low quality producers:

• A)the present value of revenue must be positive.
• B)the present value of profits has to be higher than the costs of operating.
• C)the present value of the premium for high quality goods must be higher than the gain from cheating.
• D)the present value of cheating must be higher than the gain from producing high quality goods.

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Definitions:

Investment

The commitment of resources such as capital or time to an endeavor with the expectation of obtaining an income or profit.

Percentage Total Return

A measure of the performance of an investment, calculated by dividing the investment's profit by its initial cost.

Dividends

Payments made by a corporation to its shareholder members, usually derived from profits.

Capital Gains Yield

The appreciation in the price of an investment, calculated as the increase in the investment's value divided by its initial purchase price.