Chapter 5R, Problem 3FRQ

To determine

The statement that is true in the given scenario.

Answer to Problem 3FRQ

Option c is correct.

Explanation of Solution

Explanation for the correct option:

c.

In a financial system, efforts are taken to reduce the transaction cost, ensure liquidity and minimize financial risk which can be done by ensuring the efficiency of the financial market.

Therefore, option c is correct.

Explanation for incorrect options:

a.

A prisoner’s dilemma is a situation where an individual who is a decision maker has an incentive of selecting a way that can create a less-than-optimal outcome for an individual as a group. This situation does not apply to Firm X and Firm Y as they both are not in a situation.

Therefore, option a is incorrect.

b.

The financial system helps in reducing transaction costs so that traders can purchase or sell financial assets more easily. Therefore, option b is incorrect.

d.

A diversified market is less risky than an undiversified market. Decreasing diversification will increase the market risk. Therefore, option d is incorrect.

e.

Ensuring liquidity is one of the tasks of the financial system. Therefore, option e is incorrect.

Economics Concept Introduction

Payoff matrix and Nash equilibrium: Nash equilibrium refers to the outcome at which both players receive no incentive in changing their previous strategy. In a payoff matrix where there are two players, for a Nash equilibrium, the row which is selected should maximize the payoff for the row player and the column should also maximize the payoff of the column player.