The Baumol Model Determines the Optimal Cash Balance By

question 48

Multiple Choice

The Baumol model determines the optimal cash balance by:

• A)balancing total costs against opportunity costs.
• B)minimizing total costs of holding cash against trading securities costs.
• C)balancing trading securities costs against total costs.
• D)minimizing total costs less trading costs.
• E)None of the above.

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Definitions:

Maximum Economic Profits

The highest level of profit achievable by a firm operating in a perfectly competitive market, where marginal cost equals marginal revenue.

Short-Run Equilibrium

A state in which supply and demand are balanced at a particular price level within a short timeframe, before any significant external changes can occur.

Total Cost

The entire cost of production including both fixed and variable costs.

Marginal Cost

The upsurge in total financial outlay occasioned by the production of one supplementary unit of a product or service.