Figure 3-6 -Auctions in Recent Years Have Resulted in Higher Prices Paid

question 328

Multiple Choice

Figure 3-6
-Auctions in recent years have resulted in higher prices paid for letters written by John Wilkes Booth than those written by Abraham Lincoln. Which of the following events would cause the price differences in these letters to get smaller?

• A) The demand for Booth letters decreases.
• B) The supply of Lincoln letters increases.
• C) The demand for Lincoln letters increases, and the supply of Booth letters increases.
• D) The demand for Lincoln letters decreases, and the demand for Booth letters increases.

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Definitions:

Discount Rate

A rate used to convert future cash flows into their present value, reflecting the opportunity cost of capital or the interest rate.

Perpetuity

An annuity that pays a constant amount to an investor at regular periods forever.

Discount Rate

The rate of interest applied in the evaluation of discounted cash flows to calculate the current value of future cash movements.

Perpetuity

A financial instrument that pays a fixed amount of income indefinitely, with no end date.