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Q:
Typically, debentures have higher interest rates than mortgage bonds primarily because the mortgage bonds are backed by assets while debentures are unsecured.
a. True
b. False
Q:
Which of the following is most likely to be the subject of informational advertising?A) a search good B) a credible goodC) an experience good D) an inexperience good
Q:
Under a term loan the borrower agrees to make a series of amortized payments on specific dates. Although speed and flexibility are two advantages of term loans, such loans typically have high issuance costs.
a. True
b. False
Q:
Which of the following is a characteristic of monopolistic competition?A) Few firms B) Homogeneous productsC) Easy entry and exit D) Strategic dependence
Q:
Unlike a perfectly competitive firm, a monopolist faces a demand curve that isA) upward sloping. B) horizontal.C) vertical. D) downward sloping.
Q:
Bond ratings of ____ and higher are considered investment grade.
a. AAA
b. AA
c. A
d. BBB
Q:
What determines the perfect competitorʹs supply curve? How is the industry supply curve found?
Q:
Stock repurchases might be undertaken when
a. the firm has excess cash but no "good" investment opportunities
b. the price of the firm's stock is undervalued
c. the firm wants to increase the proportion of its assets that are financed with debt
d. management wants to gain more ownership control of the firm-by repurchasing the stock of other investors
e. All of the above are reasons stock repurchases might be undertaken
Q:
The income that an investor earns from municipal bonds is
a. exempt from federal, state, and local taxes.
b. generally exempt from federal taxes, but most states impose local taxes.
c. generally exempt from state and local taxes, but taxed federally.
d. fully taxed by federal, state, and local authorities.
Q:
The demand curve for a perfectly competitive firm isA) elastic at relatively high prices and inelastic at relatively low prices. B) perfectly elastic.C) perfectly inelastic.D) unitary elastic.
Q:
QTFCTVCTC0$90$ 0$ 901902511529032122390421324906415459095185Refer to the above table. At an output of 5 units, average total costs areA) $18. B) $19. C) $37. D) $185.
Q:
Which of the following is not an advantage of a term loan over public debt offerings?
a. speed
b. low issuance costs
c. significantly lower interest rates
d. flexibility
Q:
A ____ is an agreement to between two firms where one firm agrees to sell some of its financial assets to another and then buy the financial assets back from that firm at a later time
a. buy back
b. call option
c. repurchase agreement
d. put option
Q:
You have won the lottery. There are two payment options for you. The first option is a lump sum payment of $10 million that you will receive immediately. The second option is an annual payment of $1 million for each of the next 12 years. Assume there is no inflation. How would you make a decision between the two options?
Q:
Which of the following is NOT a type of debt?
a. commercial paper
b. certificate of deposit
c. term loan
d. preferred stock
Q:
Accounting costs representA) explicit costs paid by the firm. B) opportunity costs.C) both sunk and future costs. D) long run costs only.
Q:
Which of the following is NOT a source of equity on a firm's balance sheet?
a. additional paid-in capital
b. retained earnings
c. common stock
d. property, plant, and equipment
Q:
The negative relationship between the quantity demanded of a commodity and its price can be explained by the principle ofA) increasing total utility. B) contingent valuation.C) indifference analysis. D) diminishing marginal utility.
Q:
Corporations issue and purchase a variety of financial securities for all of the following reasons EXCEPT
a. raise capital
b. hedge against risk
c. alter the capital structure of the firm
d. all of the above are reasons to issue or purchase financial securities
Q:
Quantity of Movies Watched per WeekMichelleʹs Total Utility per WeekRobertʹs Total Utility per Week00011001002195190327027043403405390400642035074353908445420945044010440450Refer to the above table. What is the marginal utility for the 3rd unit for Michelle and for Robert?A) Michelle: -10; Robert: 20 B) Michelle: 75; Robert: 75C) Michelle: 75; Robert: 80 D) Michelle: 270; Robert: 270
Q:
Which of the following is NOT an example of a financial asset?
a. convertible bond
b. certificate of deposit
c. preferred stock
d. inventory
e. mutual fund
Q:
An elastic response in the quantity of a good demanded would be caused byA) the availability of many substitutes. B) a lack of substitutes.C) a lack of sensitivity to the goodʹs price.D) the good representing a small portion of a personʹs budget.
Q:
A French firm is buying $1,000,000 of optical cable from a firm in the United States. The French firm will pay for the cable in thirty days. To protect itself from changes in the exchange rate between the Euro and dollar, the French firm enters into a futures contract to purchase $1,000,000 at a price of $1.25/. How many Euros will it cost the French firm to purchase $1,000,000 using the futures contract?
a. 125,000,000
b. 2,500,000
c. 1,250,000
d. 1,000,000
e. 800,000
Q:
Which of the following statements about pollution or pollution control is TRUE?A) A nationwide uniform tax on emissions is the appropriate way to reduce pollution levels.B) A tax to reduce pollution levels should be based on the economic damages rather than on the absolute amount of pollution.C) Private costs of pollution usually exceed social costs.D) The optimum amount of pollution abatement is where the total benefits of pollution abatement equal the total costs of pollution abatement.
Q:
A ____ is a financial instrument which gives the owner the right but not the obligation to sell shares of stock at a specified price during a particular time period.
a. convertible security
b. call option
c. warrant
d. put option
e. callable security
Q:
If income were distributed according to the egalitarian principle of ʺto each exactly the same,ʺ then one problem would be thatA) there would be little or no incentive for individuals to take risky, hazardous, or unpleasant jobs.B) individuals would have an excess desire to invest in their own human capital. C) too many individuals would want to take risky jobs.D) productivity levels would probably become too high.
Q:
Preferred stockholders generally are given the right to vote for directors if
a. the preferred stock is participating preferred stock.
b. the directors are elected under the cumulative method.
c. the common stockholders do not vote in new directors with a clear majority.
d. the company cannot pay its interest payments.
e. the company has not paid the preferred dividend for a specified period.
Q:
Have unions been successful at raising wages for their members? What about raising wages for all workers?
Q:
A protective feature on preferred stock that requires preferred dividends previously not paid to be disbursed before any common stock dividends can be paid is called what?
a. cumulative dividends
b. callable dividends
c. putable dividends
d. historical dividends
e. paid dividends
Q:
A firm will hire a unit of input up to the point whereA) the marginal cost of the input equals the marginal cost of output.B) the marginal revenue product of the input is equal to the marginal factor cost of the input. C) the price of the input is equal to the price of output.D) the marginal physical product of the input is equal to the price of output.
Q:
A(n) ____ is a bond that pays no annual interest but is sold at a discount below par, thus providing compensation to investors in the form of capital appreciation.
a. coupon bond
b. income bond
c. convertible bond
d. zero coupon bond
e. callable bond
Q:
When the supply of labor to a firm is perfectly elastic the marginal factor cost will equal theA) market price of the product. B) wage rate.C) marginal physical product. D) wage rate times the number of workers.
Q:
A(n) ____ is generally obtained from a bank or insurance company and the borrower agrees to make a series of payments consisting of interest and principal.
a. putable bond
b. bankers acceptance
c. income bond
d. term loan
e. certificate of deposit
Q:
The problem of excess pollution mainly occurs because ofA) asymmetric information. B) a positive externality.C) a negative externality. D) a monopoly.
Q:
Sharon has a convertible bond with a face value of $1,000 that can be converted into 40 shares of common stock of Mountain Ice Corporation. If the current price of the stock is $20, what is the conversion price of the bond?
a. $20
b. $50
c. $800
d. $500
e. None of the above.
Q:
Which of the following is NOT a condition that helps enforce a cartel agreement?A) a small number of firms B) nearly homogeneous productsC) easily observable prices D) large variation in input prices
Q:
An investor purchased a call option that allows her to purchase 100 shares of Dell Computer common stock for $45 per share any time during the next six months. The price she paid for the option was $2.50 per share, or $250 total, and the current market price of Dell's stock is $42.50. If the price of Dell increases to $44.50 and the investor decides to exercise it, what will be the gain or loss that results from the option position that was held? Ignore taxes and commissions.
a. $200 gain
b. $300 loss
c. $50 loss
d. $450 loss
e. None of the above.
Q:
Which of the following is FALSE with respect to brand names and advertising?A) Because ʺdifferentnessʺ has value to customers, monopolistically competitive firms regard their brand names as valuable.B) Firms use trademarks - words, symbols, and logos - to distinguish their product brands. C) Companies do not regard their brands as valuable private (intellectual) property because the value cannot be quantified.D) There is considerable shifting over time in the market value rankings of various U.S. product brands.
Q:
An investor purchased a call option that allows her to purchase 100 shares of Dell Computer common stock for $45 per share any time during the next six months. The price she paid for the option was $2.50 per share, or $250 total, and the current market price of Dell's stock is $42.50. If the price of Dell increases to $50 and the investor decides to exercise it, what will be the gain or loss that results from the option position that was held? Ignore taxes and commissions.
a. $500 gain
b. $250 loss
c. $750 gain
d. $250 gain
e. None of the above.
Q:
Which of the following is NOT a characteristic of monopolistic competition?A) Product differentiation B) Barriers to entry into the marketC) Advertising D) A significant number of sellers
Q:
An investor purchased a call option that allows her to purchase 100 shares of Dell Computer common stock for $45 per share any time during the next six months. The current market price of Dell's stock is $42.50. If the price of Dell increases to $50 and the investor decides to exercise it, what will be the gain or loss that results from the exercise? Ignore taxes and commissions.
a. $500 gain
b. $250 loss
c. $750 gain
d. $250 gain
e. None of the above.
Q:
For a monopolist, marginal revenue is alwaysA) greater than price. B) equal to price.C) equal to zero. D) less than price.
Q:
B & O Railroad's convertible debentures were issued at their $1,000 par value in 2008. At any time prior to maturity on February 1, 2028, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, Pc?
a. $25
b. $1,000
c. $40
d. $1,025
e. $50
Q:
Why does the industry short-run supply curve slope upward?
Q:
NOPREM Inc. is a firm whose shareholders don't possess the preemptive right. The firm currently has 1,000 shares of stock outstanding, the price is $100 per share. The firm plans to issue an additional 1,000 shares at $90.00 per share. Since the shares will be offered to the public at large, what is the amount per share that old shareholders will lose if they are excluded from purchasing new shares?
a. $90.00
b. $5.00
c. $10.00
d. $0
e. $2.50
Q:
The demand curve for a perfectly competitive industry isA) downward sloping.B) horizontal. C) vertical.D) indeterminate without more information.
Q:
Rollincoast Incorporated issued BBB bonds two years ago that provided a yield to maturity of 11.5 percent. Long-term risk-free government bonds were yielding 8.7 percent at that time. The current risk premium on BBB bonds versus government bonds is half what it was two years ago. If the risk-free long-term governments are currently yielding 7.8 percent, then at what rate should Rollincoast expect to issue new bonds?
a. 7.8%
b. 8.7%
c. 9.2%
d. 10.2%
e. 12.9%
Q:
QTFCTVCTC0$90$ 0$ 901902511529032122390421324906415459095185Refer to the above table. At an output of 2 units, average total costs areA) $61. B) $122.C) $16. D) $45.
Q:
Which of the following statements is false?
a. Any bond sold outside the country of the borrower is called an international bond.
b. Foreign bonds and Eurobonds are two important types of international bonds.
c. Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.
d. The term Eurobond specifically applies to any foreign bonds denominated in U.S. currency.
e. None of the above.
Q:
What is the main purpose of an interest payment? What major factors affect interest rates?
Q:
Listed below are some provisions that are often contained in bond indentures:
1. Fixed assets may be used as security.
2. The bond may be subordinated to other classes of debt.
3. The bond may be made convertible.
4. The bond may have a sinking fund.
5. The bond may have a call provision.
6. The bond may have restrictive covenants in its indenture.
Which of the above provisions, each viewed alone, would tend to reduce the yield to maturity investors would otherwise require on a newly issued bond?
a. 1, 2, 3, 4, 5, 6
b. 1, 2, 3, 4, 6
c. 1, 3, 4, 5, 6
d. 1, 3, 4, 6
e. 1, 4, 6
Q:
Owners may have little to do with the management of the firm in the case ofA) partnerships. B) corporations.C) proprietorships. D) either corporations or proprietorships.
Q:
A firm plans to sell $100 million of 20-year bonds to raise capital for expansion. Which of the following provisions, if it were included in the bond's indenture, would tend to raise the coupon interest rate over what it would be if the provision were not included?
a. A call provision under which the firm may call the bonds for redemption after 5 years.
b. Provision for a sinking fund, where a set percentage of the bonds must be called for redemption at par each year.
c. A restrictive covenant which states that the firm's current ratio must always exceed 2.0.
d. A pledge of real property as security for the bonds.
e. A provision under which the bondholders may, at their option, turn the bond in to the company and receive the bond's face value; that is, the bond is redeemable at par at the holder's option.
Q:
Discuss the substitution and real-income effects of a price decrease.
Q:
Which of the following statements is correct?
a. A warrant is basically a long-term option that enables the holder to sell common stock back to the firm at an agreed upon price, at a specified time in the future.
b. Generally, warrants are distributed along with preferred stock in order to make the preferred stock less risky.
c. If a company issuing coupon paying debt wanted to reduce the cash outflows associated with the coupon payments, it could issue warrants with the debt to accomplish this.
d. One of the disadvantages of warrants to the issuing firm is that they can be detachable and can be traded separately from the debt with which they are issued.
e. Warrants are attractive to investors because when they are issued with stock, investors receive dividends on the warrants they own as well as on the underlying stock.
Q:
Quantity of Movies Watched per WeekMichelleʹs Total Utility per WeekRobertʹs Total Utility per Week00011001002195190327027043403405390400642035074353908445420945044010440450Refer to the above table. What is the marginal utility for the 10th unit for Michelle and for Robert?A) Michelle: 50; Robert: 50 B) Michelle: 15; Robert: 20C) Michelle: 10; Robert: 10 D) Michelle: -10; Robert: 10
Q:
Which of the following statements is correct?
a. A floating rate bond has an advantage over a fixed rate bond because its price is more stable and this makes a floating rate preferred bond more suitable as a liquid asset.
b. Convertible preferred stock would likely appeal more to income-oriented investors because they can convert their capital gains into bond income simply by converting their preferred stock into bonds.
c. One advantage of preferred stock from an issuer's perspective is that it has a lower after-tax cost than that of debt.
d. One principal advantage of preferred stock is that preferred stockholders have a legal enforceable right to their stock dividend, thus, preferred stock is generally less risky than unsecured debt.
e. Because of the 70% dividend exclusion rule for preferred stock dividends, the higher a company's tax bracket, the more likely it is to issue preferred stock.
Q:
Explain why an increase in price can raise total revenues if the price elasticity of demand is inelastic.
Q:
Which of the following statements is correct?
a. If the demand curve for a firm's stock is relatively flat, the firm will have a more difficult time raising a large amount of new equity funds for expansion than would be true if the demand curve were steeper.
b. Flotation costs to raise a given amount of funds would, typically, be smaller under a best-efforts arrangement than with an underwritten offering, and the corporation is also more certain of getting the needed funds under a best-efforts offering. This is why best-efforts deals are most common.
c. Par value is not necessarily the actual price at which stock is issued by the firm, but it does constitute the maximum legal liability per share in the event of bankruptcy. Thus, if a firm sold $5 par stock to investors at $30 per share, in the event of bankruptcy the firm would have to pay the stockholders no more than $5 per share.
d. The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any additional shares sold by the firm. This right protects current stockholders against both dilution of control and dilution of value.
e. One of the legal rights that often goes with common stock is the preemptive right. This is the right of present stockholders to purchase their "proportional share" of all new securities that might be issued by the firm, including common and preferred stock, and all types of debt.
Q:
Economists typically suggest three choices that allow a polluter to decide how to absorb most, or perhaps all, of the social costs of its actions, which are
A) continuing to overproduce the good, lowering the price of the good, or cutting output.
B) reducing the pollution-causing activity, changing production techniques, or paying a price to pollute.
C) installing pollution abatement equipment, paying to pollute, or just ignoring the issue.
D) paying a pollution tax, continuing to use existing production techniques, or continuing the polluting behavior without regard to the social implications.
Q:
Which of the following statements is correct?
a. One of the advantages of common stock financing is that there is no dilution of owners' equity, as there is with debt.
b. If the market price of a stock falls below its book value, the firm can be liquidated, with the book value proceeds then distributed to the shareholders. Thus, a stock's book value per share sets a floor below which the stock's market price is unlikely to fall.
c. The preemptive right gives a firm's preferred stockholders preference to assets over common stockholders in the event the firm is liquidated.
d. The steeper the demand curve for a firm's stock, the higher will be its flotation costs when it sells a new issue of common stock, other things held constant.
e. All of the above statements are false.
Q:
A major problem with using the egalitarian principle to distribute income is thatA) it would eliminate the incentives that rewards provide in an economic system. B) it is difficult to know when an equal distribution of income has been achieved. C) it would not be fair to the wealthy.D) there exist no mechanisms to carry out such a scheme.
Q:
Which of the following statements concerning preferred stock is correct?
a. Preferred stock generally has a higher component cost to the firm than does common stock.
b. By law in most states, all preferred stock issues must be cumulative, meaning that the cumulative, compounded total of all unpaid preferred dividends must be paid before dividends can be paid on the firm's common stock.
c. From the issuer's point of view, preferred stock is less risky than bonds.
d. Preferred stock, because of the current tax treatment of dividends, is bought mostly by individuals in high tax brackets.
e. Unlike bonds, preferred stock cannot have a convertible feature.
Q:
Can unions increase productivity? Explain.
Q:
Which of the following statements concerning common stock and the investment banking process is false?
a. The preemptive right gives each existing common stockholder the right to purchase his or her proportionate share of a new stock issue.
b. If a firm sells 1,000,000 new shares of Class B stock, the transaction occurs in the primary market.
c. Listing a large firm's stock is often considered to be beneficial to stockholders because the increases in liquidity and status probably outweigh the additional costs to the firm.
d. Stockholders have the right to elect the firm's directors, who in turn select the officers who manage the business. If stockholders are dissatisfied with management's performance, an outside group may ask the stockholders to vote for it in an effort to take control of the business. This action is called a margin call.
e. A large issue of new stock could cause the stock price to fall. This loss is called "market pressure," and it is treated as a flotation cost because it is a cost associated with the new issue.
Q:
If a firm faces perfectly competitive product and factor markets and the marginal product of labor and capital are 4 and 9, respectively, while the wage rate is $2 and the rental rate on capital is $4, the firm shouldA) use relatively more labor. B) use relatively less labor.C) increase all inputs proportionately. D) decrease all inputs proportionately.
Q:
Which of the following statements is false?
a. When a corporation's shares are owned by a few individuals who are associated with or are the firm's management, we say that the firm is "closely held."
b. A publicly owned corporation is simply a company whose shares are held by the investing public, which may include other corporations and institutions as well as individuals.
c. Going public establishes a true market value for the firm and ensures that a liquid market will always exist for the firm's shares.
d. When stock in a closely held corporation is offered to the public for the first time the transaction is called "going public" and the market for such stock is called the new issue market.
Q:
The marginal factor cost is theA) additional revenue obtained from a one -unit change in labor input. B) additional revenue obtained from a one -unit change in output.C) change in output resulting from the addition of one more worker.D) cost of using an additional unit of an input.
Q:
The sale of new common stock at a price greater than par value will affect which balance sheet accounts? (Choose the most complete answer.)
a. Common stock, paid-in capital, retained earnings.
b. Assets, common stock, paid-in capital.
c. Liabilities, common equity.
d. Common stock, retained earnings.
e. Common stock, paid-in capital.
Q:
The lemons problem occurs mainly because ofA) asymmetric information. B) a market failure.C) negative externality. D) a monopoly.
Q:
Which of the following statements is correct?
a. Once a firm declares bankruptcy, it is liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and lawyer fees.
b. A firm with a sinking fund payment coming due would generally choose to buy back bonds in the open market, if the price of the bond exceeds the sinking fund call price.
c. Income bonds pay interest only when the amount of the interest is actually earned by the company. Thus, these securities cannot bankrupt a company and this makes them riskier to investors than regular bonds.
d. One disadvantage of zero-coupon bonds is that issuing firms cannot realize the tax savings from issuing debt until the bonds mature.
e. Other things held constant, callable bonds should have a lower yield to maturity than noncallable bonds.
Q:
Which of the following is a condition that helps enforce a cartel agreement?A) a large number of firms B) relatively differentiated productsC) easily observable prices D) large variation in prices
Q:
Which of the following statements is correct?
a. Because bonds can generally be called only at a premium, meaning that the bondholder will enjoy a capital gain, including a call provision (other than a sinking fund call) in the indenture increases the value of the bond and lowers the bond's required rate of return.
b. You are considering two bonds. Both are rated double A (AA), both mature in 20 years, both have a 10 percent coupon, and both are offered to you at their $1,000 par value. However, Bond X has a sinking fund while Bond Y does not. This probably is not an equilibrium situation, as Bond X, which has the sinking fund, generally would be expected to have a higher yield than Bond Y.
c. A sinking fund provides for the orderly retirement of a debt (or preferred stock) issue. Sinking funds generally force the firm to call a percentage of the issue each year. However, the call price for sinking fund purposes is generally higher than the call price for refunding purposes.
d. Zero coupon bonds are bought primarily by pension funds and other tax exempt investors because they avoid the tax that non-tax exempt investors must pay on the accrued value each year.
e. All of the above statements are false.
Q:
Advertising intended to reach as many consumers as possible, typically through television, newspaper, or magazine ads is referred to asA) interactive advertising. B) direct marketing.C) mass marketing. D) subliminal advertising.
Q:
A company is planning to raise $1,000,000 to finance a new plant. Which of the following statements is correct?
a. If debt is used to raise the million dollars, the cost of the debt would be lower if the debt is in the form of a fixed rate bond rather than a floating rate bond.
b. If debt is used to raise the million dollars, the cost of the debt would be lower if the debt is in the form of a bond rather than a term loan.
c. If debt is used to raise the million dollars, but $500,000 is raised as a first mortgage bond on the new plant and $500,000 as debentures, the interest rate on the first mortgage bond would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds.
d. The company would be especially anxious to have a call provision included in the indenture if its management thinks that interest rates are almost certain to rise in the foreseeable future.
e. All of the above statements are false.
Q:
ʺThe deadweight loss of a monopoly equals the monopoly firmʹs profits.ʺ Do you agree or disagree? Why?
Q:
Companies A and B recently established a new jointly owned subsidiary, ABBA Corporation. ABBA now requires $100 million of capital. A and B will supply $40 million of common equity, $20 million each. The remaining $60 million will be raised by using some combination of debt and preferred stock. Which of the following statements is most correct?
a. The interest rate on the debt would be higher if ABBA uses $60 million of debt and $0 preferred than it would be if ABBA uses $30 million of debt and $30 million of preferred.
b. Because 70 percent of preferred stock dividends received are excluded from a corporation's taxable income, (1) most preferred stock is owned by corporations, and (2) frequently a company's bond interest rate is higher than its preferred stock dividend yield.
c. If ABBA's preferred stock were made convertible into its common, the preferred would have a lower dividend yield than if the preferred were nonconvertible.
d. All of the above statements are true.
e. Only answers a and b above are true.
Q:
In order to sell more goods and/or services, what must a monopoly do?A) Reduce price and increase output B) Increase outputC) Increase price D) Nothing, since it is the market
Q:
Assume the securities are all issued by the same firm. From the investor's standpoint, rank the following securities in order of increasing risk (the number of the least risky security is placed first, or to the left, in the answer set).
(1) Preferred stock.
(2) Income bonds.
(3) Convertible preferred stock.
(4) Mortgage bonds.
a. 1, 2, 3, 4
b. 4, 1, 2, 3
c. 4, 1, 3, 2
d. 4, 2, 1, 3
e. 4, 2, 3, 1
Q:
The short-run supply curve for the perfectly competitive firm is the portion of itsA) MC curve above the AVC curve. B) MC curve above the AFC curve.C) MC curve above the ATC curve. D) MC curve above the MR curve.