Firms HD and LD Are Identical Except for Their Level

question 69

Multiple Choice

Firms HD and LD are identical except for their level of debt and the interest rates they pay on debt⎯HD has more debt and pays a higher interest rate on that debt.Based on the data given below, what is the difference between the two firms' ROEs?

• A) 2.51%
• B) 2.65%
• C) 2.79%
• D) 2.93%
• E) 3.07%

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Definitions:

Decreasing Marginal

In economics, a situation where each additional unit of input results in a smaller increase in output compared to previous units.

Increasing Returns

A situation in production where an increase in the amount of inputs results in a disproportionately larger increase in output.

Production Isoquant

A curve that represents all combinations of inputs that produce the same level of output, used in the analysis of production technology.

Marginal Products

The additional output that is produced by using one more unit of a particular input, holding other inputs constant, critical in the analysis of production efficiency.