What will happen if the current asset price is less than the present value of income?
A)Sellers will raise the asset's price until it equals the present value of income.
B)Buyers will bid up the asset's price until it equals the present value of income.
C)Buyers will bid the asset's price down until it equals the discount rate.
D)Buyers will bid up the asset's price until it is above the present value of income.

Question

Quizplus · Accepted Answer

If the current asset price is less than the present value of income, buyers will see that the asset is undervalued and bid up the price until it equals the present value of income. Therefore, choice B is the correct answer.  Sellers raising the price until it equals the present value of income (choice A) is not as likely to happen because if the asset is currently undervalued, sellers may not be aware of its true value. Buyers bidding the asset's price down until it equals the discount rate (choice C) is also unlikely because buyers want to purchase an asset that is undervalued, not overvalued. Lastly, buyers bidding up the asset's price until it is above the present value of income (choice D) is not a rational behavior since it means buyers would be paying more for an asset than it is worth.

What Will Happen If the Current Asset Price Is Less