Which of the Following Is True of the Baumol Model

question 20

Multiple Choice

Which of the following is true of the Baumol model? Note that the optimal cash transfer amount is C*?

• A) If the fixed costs of selling securities or obtaining a loan (cost per transaction) increase by 20%, then C* will increase by 20%
• B) If the total amount of cash needed during the year increases by 20%, then C* will increase by 20%.
• C) If the average cash balance increases by 20%, then the total holding costs will increase by 20%.
• D) If the average cash balance increases by 20% the total transactions costs will increase by 20%.
• E) None of the above is true.

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Definitions:

Goods In Process Inventory

Partially finished goods that are still in the production process at the end of an accounting period.

Finished Goods Inventory

Products that have completed the manufacturing process but have not yet been sold to customers.