Using the Constant Growth Model, an Increase in the Required

question 30

Multiple Choice

Using the constant growth model, an increase in the required rate of return from 17 to 20 percent combined with an increase in the growth rate from 8 to 11 percent would cause the price to

• A) rise more than 3%.
• B) rise less than 3%.
• C) remain constant.
• D) fall more than 3%.
• E) fall less than 3%.

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Definitions:

Short Run

A period in which at least one input is fixed and cannot be changed by the firm.

Substitutes

Products or services that can replace each other, where an increase in the price of one leads to an increase in demand for the other.

Elastic Demand

Elastic Demand occurs when the quantity demanded of a product changes significantly as its price changes.

Luxury Items

Goods and services that are considered non-essential but desirable, often characterized by their high quality, exclusivity, and high price.