Firm a Has Assets That Are Mainly in Financial Securities

question 30

Multiple Choice

Firm A has assets that are mainly in financial securities and whose liabilities carry variable interest rates; Firm B has the same assets as Firm A and the same amount of liabilities but its liabilities are all at fixed interest rates. If the central bank lowers interest rates, everything else constant:

• A) Firm B's net worth will increase more than Firm A's.
• B) Firm A's net worth will increase more than Firm B's.
• C) Neither firm's net worth will change.
• D) The net worth of both firms will increase and by the same amount.

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Definitions:

Price Elasticity Of Demand

Percentage change in quantity demanded of a good resulting from a 1-percent increase in its price.

Marginal Revenue

The extra revenue received from the sale of an additional unit of a product or service.

Elasticity Of Demand

A metric reflecting how demand for a commodity reacts to price adjustments.

Profit-Maximizing Price

The price level at which a company can sell its product to maximize its profit, calculated by understanding demand and cost structures.