Which of the Following Statements Is True About the Price

question 50

Multiple Choice

Which of the following statements is true about the price earnings (P/E) ratio?

• A)It is a ratio of importance to creditors.
• B)A high P/E ratio indicates investors have little confidence in the future profit potential of the company.
• C)The P/E ratio could be used to approximate the value investors would be willing to pay for the company's acquisition from existing owners.
• D)The P/E ratio increases as profit increases.

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Definitions:

Price Elasticity

The measure of how much the quantity demanded of a good responds to a change in the price of that good, often used to understand the sensitivity of consumers to price changes.

Income Elasticity

Income elasticity measures how the demand for a good or service changes in response to changes in consumer income.

Marginal Utility

The extra pleasure or benefit gained by a consumer from consuming an additional unit of a product or service.

Utility Function

A mathematical representation of how consumers rank different bundles or combinations of goods according to their level of satisfaction.