Assume There Are Two Companies

question 40

Multiple Choice

Assume there are two companies. Both issue stock, but one is high quality and the other low quality. If potential investors cannot distinguish the quality of the company:

• A) the shares of the low quality firm will disappear from the market.
• B) the shares of both companies will trade on the market.
• C) the shares of the high quality firm will disappear from the market.
• D) this is an example of moral hazard and the shares of both companies will cease to trade.

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Definitions:

Six-figure Accuracy

A measure of precision that implies numerical values are accurate to within plus or minus one out of a hundred thousand.

Simplify

To simplify means to make something less complex or easier to understand, often by reducing it to its basic components.

Exponent Laws

Mathematical rules governing operations involving powers, such as multiplication and division of exponents.

Simplify

To make a complex problem or equation easier to understand or solve by reducing it to its basic components.