FIGURE 5-1 -Refer to Figure 5-1.In This Market,suppose the Government Announces That

question 35

Multiple Choice

FIGURE 5-1
-Refer to Figure 5-1.In this market,suppose the government announces that the price must be P₃ or lower.This price (P₃) is referred to as

• A)a non-binding price ceiling.
• B)a binding price floor.
• C)an equilibrium price.
• D)a price ceiling.
• E)a price floor.

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Definitions:

Agency Costs

Expenses, either direct or indirect, that are borne by a principal as a result of having delegated authority to an agent. An example is the costs borne by shareholders to encourage managers to maximize a firm’s stock price rather than act in their own self-interests. These costs may also arise from lost efficiency and the expense of monitoring management to ensure that debtholders’ rights are protected.

Bankruptcy Costs

Expenses and fees associated with the process of declaring bankruptcy, including legal, administrative, and any potential asset liquidation costs.

Business Risk

The risk inherent in the operations of the firm, prior to the financing decision. Thus, business risk is the uncertainty inherent in a total risk sense, future operating income, or earnings before interest and taxes. Business risk is caused by many factors. Two of the most important are sales variability and operating leverage.

Standard Deviation

A statistical measure of the dispersion or variability of a set of data points, often used in finance to gauge investment risk.