The Substitution Effect Indicates That a Profit-Seeking Firm Will Use

question 158

Multiple Choice

The substitution effect indicates that a profit-seeking firm will use

• A) more of an input whose price has fallen and less of other inputs in producing a given output.
• B) more of all inputs if production costs fall.
• C) more of those inputs whose marginal productivity is the greatest.
• D) less of an input whose price has fallen and more of other inputs in producing a given output.

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Definitions:

Present Value

The present worth of a future amount of money or series of cash inflows, calculated using a given rate of return.

Annual Net Cash Flows

Annual net cash flows represent the amount of cash a company generates or loses within a year from its operating, investing, and financing activities.

Required Return

The minimum amount of profit or gain an investor expects to achieve from an investment to make it worthwhile.

Net Present Value Method

A financial modeling technique that evaluates the profitability of an investment by discounting future cash flows to their present value and subtracting the initial investment.