Question 1
The expected cost of an investment
◦ is zero if a firm uses its own funds.
◦ equals the market rate of interest plus the normal rate of return on an investment.
◦ depends on the market interest rate.
◦ equals the market rate of interest plus the inflation rate.
Question 2
You work as a forecaster for the major producer of digital cameras. You know that there is a strong positive relationship between the demand for digital cameras and the birth of a first child. A report has just been issued predicting that the birthrate is expected to decrease steadily over the next 10 years. You should recommend which of the following courses of action to the firm?
◦ Don't change the amount of investment made, but lower the price of digital cameras in response to the expected decrease in the demand.
◦ Suggest that decreasing investment in new capital to produce digital cameras occur only after it can be verified that the birthrate has decreased.
◦ Start to decrease investment now so that when the birthrate decreases and the demand for digital cameras decreases, the firm will not have excess inventories due to the decrease in demand.
◦ Suggest that the firm increase its advertising to avert a substantial decrease in demand for digital cameras.
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