Tutor profile: Kevin L.
Distinguish opportunity costs from transaction costs and give an example of each.
An opportunity cost is the cost of the next best choice (not that of everything being given up when making a choice), while transaction costs are the costs of dealing in the marketplace, exclusive of price. Transaction costs can also be viewed as the opportunity cost of conducting a transaction. Sleeping is an opportunity cost of going to class if you consider that the next best option. Time is always an inherent transaction cost. When buying a product, the time consumers spend becoming informed becomes a transaction cost.
What does the government do when there is a fear of hyperinflation?
The government has fiscal and monetary policies it can use in order to control hyperinflation. The monetary policies (the Fed’s use of interest rates, reserve requirements, etc.) are discussed in detail in this chapter. The fiscal policies include the use of taxation and government spending to regulate the aggregate level of economic activity. Increasing taxes and decreasing government spending slows down growth in the economy and fights inflation.
When should a company buy back stock?
When it believes the stock is undervalued, has extra cash, and believes it can make money by investing in itself. This can happen in a variety of situations. For example, if a company has suffered some decreased earnings because of an inherently cyclical industry (such as the semiconductor industry), and believes its stock price is unjustifiably low, it will buy back its own stock. On other occasions, a company will buy back its stock if investors are driving down the price precipitously. In this situation, the company is attempting to send a signal to the market that it is optimistic that its falling stock price is not justified. It’s saying: “We know more than anyone else about our company. We are buying our stock back. Do you really think our stock price should be this low?”
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