Specialists Try to Maintain a Narrow Bid-Ask Spread Because

question 69

Multiple Choice

Specialists try to maintain a narrow bid-ask spread because:
I. If the spread is too large, they will not participate in as many trades, losing commission income.
II. The exchange requires specialists to maintain price continuity.
III. Specialists are nonprofit entities designed to facilitate market transactions rather than make a profit.

• A) I only
• B) I and II only
• C) II and III only
• D) I, II, and III

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Definitions:

Equilibrium Price

The price at which the quantity of a good or service demanded equals the quantity supplied, leading to market balance.

Demand Curve

is a graph showing the relationship between the price of a good or service and the quantity demanded by consumers, typically downsloping to indicate that lower prices increase demand.

Competitive Firm

A company that operates in a market with many competitors, facing a highly elastic demand curve for its product because many substitutes are available.

Supply Curve

A graphical representation showing the relationship between the price of a good or service and the quantity of that good or service that a supplier is willing and able to supply in the market.