Why Could Leverage Lead to an Asset Price Bubble

question 14

Multiple Choice

Why could leverage lead to an asset price bubble?

• A)It allows investors to take advantage of disinflation.
• B)It takes advantage of insiders who help outsiders.
• C)It increases the ability of people to purchase financial instruments.
• D)It takes advantage of extrapolative expectations.

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Definitions:

Variable Cost

Costs that vary directly with the level of production or sales volume, such as materials and labor.

Unit Selling Price

The amount for which a unit of product is sold, not including any discounts or allowances.

Variable Cost Method

An accounting approach where costs that vary directly with the level of production are allocated to products, influencing the cost of goods sold and inventory valuation.

Contribution Margin

The difference between the sales revenue of a product and its variable costs, indicating the amount contributing towards covering fixed costs and generating profit.