Multiple Choice
Which of the following is typically considered part of a consumer's external social environment when analyzing 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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In the context of consumer surplus and willingness to pay, portfolio diversification eliminates which of the following types of risk?
A
Moral hazard
B
Market risk
C
Idiosyncratic (unsystematic) risk
D
Systematic risk
Verified step by step guidance1
Understand the types of risk involved in investment and consumer decisions: Systematic risk (also called market risk) affects the entire market or economy, while idiosyncratic risk (also called unsystematic risk) is specific to an individual asset or company.
Recall that portfolio diversification involves holding a variety of assets to reduce exposure to risks that affect only some assets but not others.
Recognize that diversification cannot eliminate systematic risk because it impacts all assets simultaneously and cannot be avoided by spreading investments.
Identify that diversification effectively reduces or eliminates idiosyncratic risk because the unique risks of individual assets tend to cancel out when combined in a portfolio.
Conclude that the type of risk eliminated by portfolio diversification is idiosyncratic (unsystematic) risk, not moral hazard or systematic (market) risk.
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