If the Market Demand for the Product Increases, in the Short

question 199

Multiple Choice

If the market demand for the product increases, in the short run a purely competitive firm

• A)will not change its output quantity because there are so many firms that the individual firm will not be affected by the change.
• B)will earn higher profits or experience smaller losses as a result of the change in the market.
• C)will experience no change in costs as it steps up production in response to the change in the market.
• D)can employ more inputs and increase the size of its plant, to respond to the change in the market.

---

Definitions:

Capital Structure

The mix of debt and equity financing a company uses to fund its operations and growth.

M&M Proposition II

Modigliani and Miller's Proposition II states that a company's cost of equity increases as it increases its leverage due to the risk premium on equity.

Debt-Equity Ratio

A financial ratio that measures the relative proportion of shareholders' equity and debt used to finance a company's assets.

Financial Risk

The chance of incurring a loss in capital in an investment or business operation.