When Firms Are Faced with Making Strategic Choices in Order

question 401

Multiple Choice

When firms are faced with making strategic choices in order to maximize profit,economists typically use

• A) the theory of monopoly to model their behavior.
• B) the theory of aggressive competition to model their behavior.
• C) game theory to model their behavior.
• D) cartel theory to model their behavior.

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Definitions:

Capital Market Line

A line used in the capital asset pricing model to depict the rates of return for efficient portfolios depending on the risk-free rate of return and the level of risk (standard deviation) for a particular portfolio.

Characteristic Line

In finance, a line that describes the relationship between the return on an investment and the return on the market as a whole, used in the Capital Asset Pricing Model.

Systematic Risk

Systemic risk associated with the overall market or a particular segment of the market, widely known as market risk, remains even after diversification efforts.

Unsystematic Risk

The risk of price change due to the unique circumstances of a specific security, as opposed to the overall market.