A Key Finding of the Economic Analysis of Financial Structure

question 51

Multiple Choice

A key finding of the economic analysis of financial structure is that

• A) the existence of the free-rider problem for traded securities helps to explain why banks play a predominant role in financing the activities of businesses.
• B) while free-rider problems limit the extent to which securities markets finance some business activities, the majority of funds going to businesses are channeled through securities markets.
• C) given the great extent to which securities markets are regulated, free-rider problems are not of significant economic consequence in these markets.
• D) economists do not have a very good explanation for why securities markets are so heavily regulated.

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Definitions:

Fixed Costs

Expenses that do not change with the level of output or sales in the short term, such as rent, salaries, and insurance.

Contribution Margin Ratio

A financial metric that measures the proportion of revenue that exceeds variable costs, indicating how much of sales revenue is available to cover fixed costs and generate profit.

Fixed Costs

Costs that remain constant regardless of the amount of output or the level of business operations, including expenses like rent, wages, and insurance fees.

Rent Expense

The cost incurred from renting property or equipment for business or personal use, recognized as an expense on the income statement.