Asked by Tyler Michael on Sep 24, 2024
Verified
The concept of mean reversion is defined by
A) the tendency of profits to revert to zero
B) the tendency of costs to revert to zero
C) the tendency of economic profits to revert to zero
D) the tendency of profits to revert to negative
Mean Reversion
The financial theory suggesting prices and returns eventually move back towards the mean or average.
Economic Profits
The difference between a firm's total revenues and its total costs, including both explicit and implicit costs.
- Understand the mechanics of mean reversion in economic profits and how it affects long-term industry equilibrium.
Verified Answer
BC
Braden Couch3 days ago
Final Answer :
C
Explanation :
Mean reversion refers to the tendency of economic profits to revert to zero over time. This means that in the long run, companies that are earning high profits will face competition, which will drive down their profits, while companies with low profits may improve their operations or find new market opportunities that help them increase their profits. Eventually, these companies will converge towards average profits in their industry.
Learning Objectives
- Understand the mechanics of mean reversion in economic profits and how it affects long-term industry equilibrium.