Suppose That Firms a and B Each Produce High-Resolution Computer

question 131

Multiple Choice

Suppose that Firms A and B each produce high-resolution computer monitors, but Firm A can do so at a lower cost. Cassie and David each want to purchase a high-resolution computer monitor, but David is willing to pay more than Cassie. If Firm A produces a monitor that Cassie buys but David does not, then the market outcome illustrates which of the following principles?
i. Free markets allocate the supply of goods to the buyers who value them most highly, as measured by their willingness to pay.
ii. Free markets allocate the demand for goods to the sellers who can produce them at the least cost.

• A) i) only
• B) ii) only
• C) both i) and ii)
• D) neither i) nor ii)

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Definitions:

Stated Rate

The interest rate declared on a financial instrument, such as a bond or loan, not accounting for compounding or market conditions.

Market Rate

The prevailing interest rate available in the marketplace for transactions involving similar assets or liabilities.

A Premium

An amount paid exceeding the nominal or face value of a security or insurance policy.

Effective Yield

Effective yield is an investment's annual rate of interest when compounding occurs more often than once a year.