Multiple Choice
How does a consumer determine if a purchase is a good deal in terms of consumer surplus and willingness to pay?
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5. Consumer and Producer Surplus; Price Ceilings and Floors
Consumer Surplus and Willingness to Pay
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which of the following best explains why investors diversify their portfolios?
A
To increase the price elasticity of demand for their investments
B
To reduce risk by spreading investments across different assets
C
To ensure that their willingness to pay matches market prices
D
To maximize consumer surplus in every transaction
Verified step by step guidance1
Understand the concept of diversification in investment: Diversification means spreading investments across various assets to reduce exposure to any single asset's risk.
Recall the primary goal of diversification: It is to reduce the overall risk of the investment portfolio by not putting all funds into one type of asset, which might be volatile or risky.
Analyze the options given: Increasing price elasticity of demand relates to consumer behavior, not investment strategy; willingness to pay matching market prices is about market equilibrium, not diversification; maximizing consumer surplus is a concept from consumer theory, unrelated to investment portfolios.
Identify the option that aligns with the purpose of diversification: Reducing risk by spreading investments across different assets directly addresses the goal of diversification.
Conclude that investors diversify their portfolios primarily to manage and reduce risk, ensuring that poor performance in one asset does not heavily impact the entire portfolio.
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