. A natural monopolist has the total cost function C(Q) = 500 + 5Q and faces the inverse demand curve P = 100 – Q

a) Find the monopolist’s price, quantity, profits, consumer surplus and deadweight loss if the monopolist is not constrained by a regulator (you probably want to draw a picture to help you answer CS and DWL)

P = _________ Q = _________ π = _________ CS = ¬_________ DWL = _________

b) A regulator constrains the monopolist to marginal cost pricing and will subsidize the firm to stay in business and earn 0 profit. Find the monopolist’s price, quantity, subsidy, consumer surplus and deadweight loss (ignore welfare losses associated with funding the subsidy).

P = _________ Q = _________ subsidy = _________ CS = ¬_________ DWL = _________  

c) A regulator constrains the monopolist to average cost pricing. Find the monopolist’s price, quantity, consumer surplus and deadweight loss.

P = _________ Q = _________ CS = ¬_________ DWL = _________

You have the following information about the yield curve – Term 1 2 3 4 Rate 4% 4.50% 5% 5.50% What should be the price of a bond with a face value of $100 and an annual coupon of 5% that matures in 4 years. Show all calculations.

In the above question if the market price of the bond is $95, can you do arbitrage? Show how and your profit or loss. Show all calculations.

If the market price of the bond is $115, can you do arbitrage? Show how and your profit or loss. Show all calculations.

Estimate the 1-year forward rate 1 year from now. Show all calculations.

Estimate the 1-year forward rate 2 years from now. Show all calculations.

Estimate the 1-year forward rate 3 years from now. Show all calculations.

What Would You Do?

Mylan Headquarters, Canonsburg, Pennsylvania

It’s 2012 and Mylan, the company behind the EpiPen Auto-Injector, is in the middle of a lawsuit. To settle, they agree to allow a generic competitor into the market in 2015, knowing this will cut into a big part of their business when the time comes. EpiPen is an epinephrine auto-injector used to treat emergency allergy reactions. EpiPen has been on the market since the 1980s but remains under patent because of the device, particularly the safety cap for the needle, not the active ingredient, epinephrine. Epinephrine is a hormone made by the body known as adrenaline and was first isolated more than 100 years ago. In the years leading up the 2012, Mylan had already been increasing the prices of EpiPen steadily. In 2007, the cost was around $100 for an EpiPen two pack; by 2011, $165. After the settlement, Mylan used a common practice in big pharmaceutical companies of sharply increasing the price of a medication in the years before a generic becomes available. It is a final attempt to make big profits off the brand-name drug before losing business to the generic. Drug manufacturers justify the high prices saying they cover the cost of years of research and development that went into creating the drug originally. Now it’s 2016, and Mylan is charging around $600 for an EpiPen two-pack. However, Teva, the expected generic, was rejected by the Food and Drug Administration, and Auvi-Q, EpiPen’s nongeneric competition, was pulled from the marked due to dosing problems. EpiPen now has a monopoly on the market for this lifesaving drug, and people are outraged by the price. With no alternatives available, customers and politicians alike are demanding answers and change. Senator Chuck Grassley (R-Iowa) wrote in a letter to Mylan CEO Heather Bresch, “I am concerned that the substantial price increase could limit access to a much needed medication.” Democratic presidential nominee, Hillary Clinton’s campaign spokesman Tyrone Gayle called for price cuts saying, “Since there is no apparent justification for the price increase, Mylan should immediately lower the overall price of EpiPens.” People suffering from life-threatening allergies won’t be the only ones affected by the price increase. Public schools and government institutions are among EpiPen customers because the medication is used for emergency treatment of allergic reactions. Bresch said she is as frustrated by the price increase as customers, saying “everyone should be frustrated.” She said the price reflects a system where intermediaries such as wholesalers, retailers, and pharmacies all add to the ultimate list price of the medication. The system also requires customers to pay insurance premiums and out-of-pocket costs for prescriptions medications. “The patient is paying twice,” Bresch said. “They’re paying full retail price at the counter, and they’re paying higher premiums on their insurance. It was never intended that a consumer, that the patients would be paying list price, never. The system wasn’t built for that.” In response to backlash from the high prices, Mylan announced plans to expand its co-pay assistance programs, double eligibility for its patient assistance program to 400% of the federal poverty level, continue to offer the EpiPen4Schools program, and open pathways so patients can order EpiPen directly from the company, thereby reducing the cost. EpiPen4Schools was launched in 2012 and has provided more than 700,000 free EpiPens to more than 65,000 schools nationwide. Representative Elijah Cummings (D-Maryland) was not impressed by Mylan’s announcement. “Offering a meager discount only after widespread bipartisan criticism is exactly the same tactic used by drug companies across the industry to distract from their exorbitant price increases,” Cummings said. “Nobody is buying this PR move anymore. Mylan should not offer after-the-fact discounts only for a select few — it should reverse its massive price increases across the board immediately.” After continued criticism, Bresch reiterated that price is only part of the problem. “All involved must also take steps to help meaningfully address the U.S. health care crisis,” she said, “and we are committed to do our part to drive change in collaboration with policymakers, payors, patients, and health care professionals.”

1. As problems arise and solutions are pondered, who has the authority to make the ultimate decision? What is the best chain of command when big pronouncements have to be made? If you were CEO at Mylan, what would you do?
2. The company will have to adapt to survive as more competitors enter the market. What benefits would there be to a change in organizational structure or process? Should departmentalization be considered for Mylan? If so, what type of departmentalization?

Suppose that you are considering investing in a four-year bond that has a face value of $1000 and a coupon rate of 5.5 %.

a.) If the market interest rate on similar bonds is 5.5 %, the price of the bond is $ (Round your response to the nearest cent.)

The bond's current yield is % (Round your response to two decimal places.)

b.) Suppose that you purchase the bond, and the next day the market interest rate on similar bonds falls to 4 .5 %.

The price of the bond will be $ . (Round your response to the nearest cent.)

c.) Now suppose that one year has gone by since you bought the bond, and you have received the first coupon payment. The market interest rate on similar bonds is still 4.5 %.

The price of the bond another investor will be willing to pay is ? $

The total return on the bond was $

if another investor had bought the bond a year ago for the amount that was calculated in? (b), the total return would have been %

d.) Now suppose that two years have gone by since you bought the bond and that you have received the first two coupon payments. At this? point, the market interest rate on similar bonds unexpectedly rises to

9?%.

The price of the bond another investor will be willing to pay is  $. (Round your response to the nearest? cent.)

The total return on the bond was     %. (Round your response to two decimal? places.)

Suppose that another investor had bought the bond at the price you calculated in? (c).

The total return would have been

     %. (Round your response to two decimal? places.)

1)    Your sister-in-law, a newly minted graduate just landed her first job with a large research firm. Her first assignment was to come up with an estimate of the change in share price for Bubbly Incorporated over the next twelve months. She estimates the price will rise from $50 to $70 per share over the next year and highly recommends you place a buy order.

You recall from your Corporate Finance course that the estimated return and risk are the only parameters that should be considered in the investment decision & have decided to us the CAPM to help you access the desirability of purchasing shares in this firm.

Assuming an expected return on the market over the next 12 months of 10%, a risk free rate of 5%, a beta for Bubbly of 1.00 please answer the following questions:

Briefly define the CAPM and explain its use in the investment analysis process

Based on the CAPM what is the required return on an investment in Bubbly over the next 12 months? Would you make the purchase (why or why not)?

What would you expect to happen to the stock price of Bubbly in the short term? Why?

Your sister-in-law, a newly minted graduate just landed her first job with a large research firm. Her first assignment was to come up with an estimate of the change in share price for Bubbly Incorporated over the next twelve months. She estimates the price will rise from $50 to $70 per share over the next year and highly recommends you place a buy order. You recall from your Corporate Finance course that the estimated return and risk are the only parameters that should be considered in the investment decision & have decided to us the CAPM to help you access the desirability of purchasing shares in this firm. Assuming an expected return on the market over the next 12 months of 10%, a risk free rate of 5%, a beta for Bubbly of 1.00 please answer the following questions:

a)Briefly define the CAPM and explain its use in the investment analysis process

b)Based on the CAPM what is the required return on an investment in Bubbly over the next 12 months? Would you make the purchase (why or why not)? c)What would you expect to happen to the stock price of Bubbly in the short term? Why?

2) Your sister-in-law, a newly minted graduate just landed her first job with a large research firm. Her first assignment was to come up with an estimate of the change in share price for Bubbly Incorporated over the next twelve months. She estimates the price will rise from $50 to $70 per share over the next year and highly recommends you place a buy order. You recall from your Corporate Finance course that the estimated return and risk are the only parameters that should be considered in the investment decision & have decided to us the CAPM to help you access the desirability of purchasing shares in this firm. Assuming an expected return on the market over the next 12 months of 10%, a risk free rate of 5%, a beta for Bubbly of 1.00 please answer the following questions:

a) Briefly define the CAPM and explain its use in the investment analysis process

b) Based on the CAPM what is the required return on an investment in Bubbly over the next 12 months? Would you make the purchase (why or why not)?

c) What would you expect to happen to the stock price of Bubbly in the short term? Why?

You are a relatively safe driver. The probability that you will have an accident is only 1 percent. If you do have an accident, the cost of repairs and alternative transportation would reduce your disposable income from $120,000 to $60,000. Auto collision insurance that will fully insure you against your loss is being sold at a price of $0.10 for every $1 of coverage. You are considering two alternatives: buying a policy with a $1,000 deductible that essentially provides just $59,000 worth of coverage, or buying a policy that fully insures you against damage. The price of the first policy is $5,900. The price of the second policy is $6,000. Which policy do you prefer?

Complete a table for Q, FC, VC, TC, MC, MR, Price, TR & Profit using reasonable numbers for a perfectly competitive firm. For price, use a number equal to the number of letters in your first and last name (maximum 18). For Q use 0, 1, 2, 3, 4, 5, 6, 7, 8 For MC use $3, 4, 5, 7, 9, 13, 16, 21. Then make up #s for FC, VC, TC, & MR, but make certain they are corresponding to the numbers you already sued for MC & Price. Lastly, find & show the profit maximizing lvl of output showing that it's where MR=MC

Answer True or False for all questions:

1. A society that relies on a market-based economy will always protect the natural environment.

2. With the technological developments in the twenty-first century, productivity growth is no longer an important factor in economic well-being.

3. The minimum wage is an example of a government price ceiling and results in a reduction in unemployment.

4. Efficient production can be carried out anywhere on or beyond the production possibilities frontier.

5. An economist would predict that if the government imposes price controls on medical care, the result will be an increase in the supply of affordable care in the United States.

6. Black markets can generally be eliminated when price ceilings are enacted.