Tutor profile: Mark L.
The marginal propensity for Barne's & Co. to consume increased from 0.86 in 1995 to 0.91 in 1996. Which of the following can be inferred? (A) In year 1, a $100 billion increase in government spending would have increased real output by a maximum of $75 billion. (B) From year 1995 to 1996, the spending multiplier increased from 7.14 to 11.11 (C) A given change in government spending would have had a more powerful effect in year 1 than in year 2. (D) The marginal propensity to save increased from year 1 to year 2.
(B). Explanation: The marginal propensity to consume is a necessary condition of the spending multiplier. The spending multiplier measures the effect that increased government spending has on the area under the curve of the marginal utility function, or in other words the shape of the elasticity of demand. The equation for the spending multiplier is given by: 1/(1-MPC). Using this formula, the spending multiplier increases from 7.14 to 11.11 between 1995 & 1996.
Assume both portfolios A and B are well diversified, that E(rA) = 14% and E(rB) = 14.8%. If the economy has only one factor, and βA = 1.0 while βB = 1.1, what must be the risk-free rate?
(E(rA) - rf) / (βA) = (E(rB) - rf) / (βB) and solve for rf = 6% Explanation: Recall that uncertainty in asset returns has two sources: a common or macroeconomic factor and firm-specific events. The common factor is constructed to have zero expected value, because we use it to measure new information concerning the macroeconomy, which, by definition, has zero expected value. If we call F the deviation of the common factor from its expected value, β(i) the sensitivity of firm (i) to that factor, and e(i) the firm-specific disturbance, the factor model states that the actual excess return on firm (i) will equal its initially expected value plus a random amount attributable to systematic (undiversifiable) events, plus another random amount attributable to firm-specific (idiosyncratic) events. The single-factor model of excess returns is given by: R(i)= E(Ri) + βiF + e(i) where E(Ri ) is the expected excess return on stock i. Notice that if the macro factor has a value of 0 in any particular period (i.e., no macro surprises), the excess return on the security will equal its previously expected value, E(Ri ), plus the effect of firm-specific events only. The nonsystematic components of returns, the e(i)s, are assumed to be uncorrelated across stocks and with the factor F.
What are the two primary options for translating company performance of value chain activities into competitive advantage?
1. Outperform rivals by performing value chain activities more cost effectively, thereby achieving a cost-based competitive advantage. 2. Outperform rivals by performing certain differentiation-enhancing value chain activities more proficiently, thus creating a differentiation-based competitive advantage keyed to delivering what customers perceive as a superior product/service offering. Explanation: The two most common forms of adding value to a business article is to either perform the servicing, production, consumption, or distribution of that article in a less costly manner, or creating a comparatively superior product offering via delivery, components, or distribution.
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