Why Are Arbitrage Opportunities Short-Lived

question 38

Multiple Choice

Why are arbitrage opportunities short-lived?

• A)Arbitrage opportunities need a lot of information processing, which is very slow to arrive.
• B)Financial market regulations will kick in to restrict trade and effectively shut the opportunity down.
• C)Prices will fluctuate up and down as traders take advantage of the opportunity, resulting in the net present value (NPV)fluctuating between positive and negative values.
• D)Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal.

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Definitions:

MR = MC

An economic principle stating that optimal output level is reached when marginal revenue equals marginal cost, guiding profit-maximizing strategies for firms.

Economic Losses

Refers to the decrease in financial wealth of an entity, which can occur through various means such as business operations, market downturns, or unforeseen events leading to financial damage.

AVC

Average Variable Cost, which is the total variable costs divided by the quantity of output produced.

AVC

Average Variable Cost, which is calculated by dividing the variable costs by the quantity of output produced.