If firm-level asymmetric information becomes more severe, then
A)investment demand increases.
B)investment demand decreases.
C)investment demand does not change.
D)there is an unambiguous effect on investment demand.
E)investment demand decreases if the substitution effect dominates, increases if the income effect dominates.

Question

Quizplus · Accepted Answer

Asymmetric information means that some firms have more information than others, which can lead to a situation where investors may be hesitant to invest in firms with less information. This can increase the cost of capital for these firms, making it more difficult for them to borrow money and invest in new projects. Therefore, investment demand is likely to decrease.

If Firm-Level Asymmetric Information Becomes More Severe, Then