Suppose Prices of Personal Computers Fall Significantly and Consumers Respond

question 163

Multiple Choice

Suppose prices of personal computers fall significantly and consumers respond by buying more personal computers.The consumer price index

• A)reflects this price decrease accurately.
• B)understates this price decrease due to the substitution bias.
• C)overstates this price decrease due to the income bias.
• D)overstates this price decrease due to the substitution bias.

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Definitions:

Opportunity Cost of Capital

Opportunity Cost of Capital is the return that is forgone by investing in a project instead of in comparable financial securities or projects with a similar risk profile.

Net Present Value

A calculation used to assess the profitability of an investment, measuring the difference between the present value of cash inflows and the present value of cash outflows over time.

Opportunity Cost of Capital

The potential return lost by investing capital in one project instead of another with a higher return.

Expected NPV

The anticipated net present value, which estimates the present value of future cash flows minus initial investments, accounting for risk and uncertainty.