Which Statement Describes an Example of a Vicious Cycle Due

question 93

Multiple Choice

Which statement describes an example of a vicious cycle due to network effects in the market for a network good?

• A) Marginal costs rise, making it increasingly difficult for a firm to cover its costs.
• B) A firm that has been growing rapidly due to network effects starts to lose customers to a new substitute good, reducing the number of customers more rapidly.
• C) A recession causes a jump in unemployment in the market area. As unemployed people cut back on spending, the drop in sales causes firms to lay off more workers, increasing unemployment and causing firms to fail.
• D) The firm must raise prices to sell more due to network effects, but the increase in price discourages purchases, causing the firm to constantly function in conflict with itself.

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Definitions:

Cash Flow

The overall volume of cash and cash-equivalents that are exchanged in and out of a business entity.

Timing

The selection of an optimal time or period for making an investment, launching a product, or executing a decision to maximize benefits or outcomes.

Capital Budgeting

The process of planning and evaluating investments in long-term assets, analyzing their expected cash flows and their impact on the company's financial future.

Bonds

Financial instruments representing a loan made by an investor to a borrower, typically corporate or governmental, where the issuer owes the holders a debt and is obliged to pay them interest and/or repay the principal at a later date, termed the maturity.