Two customers, Bob and Ed, with two types of services: premium (P) and simple (S).

Bob’s willingness to pay for the premium service is given by uB(P) and for the simple service is uB(S). Similarly, for Ed, these values are uE (P) and uE (S), respectively.

Suppose these values are given as: uB(P) = 500, uB(S) = 200, uE(P) = 300, uE(S) = 100.

The seller of these services is looking to maximize the total payment. 1. If the seller could only set a single price say p, for premium and simple services, what price would be chosen? 2. If the seller could set different prices, say Ppr and Psm, what prices would she choose?

1. Which one of the following statements is true?

1. As time goes by calls increase in value.
2. The “stock repair strategy” involves selling stock and buying calls.
3. The price of an expensive option is less than its value.
4. The “collar or hedge wrap” involves buying in the money puts and selling in the money calls.
5. If assigned the seller of a put would be long stock.

2. Which one of the following statements is false?

1. Options never expire worthless
2. If assigned the seller of a call would deliver stock.
3. Total dollars equal 1/100 times per share quoted price.
4. Selling contracts results in a cash inflow.
5. The Collar protects long stock while allowing for modest upside gain.

2. Your uncle from back east visits for Thanksgiving. He tells you about his proposal to prevent high prices for plowing snow from driveways after snowstorms. Private companies charge $300 for this service, a price he considers too high. He wants the city council to pass a law capping the price at $100.

Using your recent learning in economics, draw the supply/demand diagram showing the situation before the law is passed. What does it look like?

Then, how would your uncle's proposal affect the market? Show this in your diagram?

What would be a better proposal? Show why this proposal is better using a supply/demand diagram.

Josh and Becky are each trying to save enough money to buy their own cars. Josh is planning to save $100 each fortnight. Becky plans to save $150 each month, but she already has $1 500 saved.
Josh’s bank compounds interest fortnightly at 3.95% per annum. Becky’s bank compounds interest monthly at 4% per annum.
At the end of two years, they will each purchase a car.
Formulas are provided on the last pages of this question booklet.
Required:
Show your workings!
a. What will be the price of the car Josh can purchase?
b. What will be the price of the car Becky can purchase?
c. What bank offers the better interest rate?

Consider the following table that contains an economy’s aggregate demand (AD) and short run aggregate supply (SAS) schedules.

A)State the short run macroeconomic equilibrium and explain why this is an equilibrium. If potential GDP for this economy is $1,050 billion, is there an inflationary or recessionary gap, and how large is it?

B)  

Say real GDP supplied falls by $150 billion at every price level. Determine the new SAS schedule and identify the new short run macroeconomic equilibrium. Name one possible reason for SAS falling.

Suppose that a simple economy produces only four goods and services: shoes, DVDs, tomatoes, and catsup in 2010. Assume one half of the tomatoes are used in making the catsup and the other half of tomatoes are purchased by households.

.What is the nominal GDP in 2010 for this simple economy?b.In 2011, suppose that the whole tomatoes products were used in making the catsup and atthe same time the price of shoes, DVDs, Tomatoes, Catsup increased three-fold each andtheir respective quantities also increased twice. Calculate Real GDP, GDP deflator and rat eof inflation in 2011?

1. Consider a perfectly competitive market in good x consisting of 250 consumers with utility function:

                                      u(x,y) = xy

Denote P_x to be the price for good x and suppose P_y = 1. Each consumer has income equal to 10. There are 100 firms producing good x according to the cost function c(x) = x² + 1.

1. Derive the demand curve for good x for a constant in the market
2. Derive the market demand curve for good x
3. Derive the individual firm’s supply curve for good x
4. Derive the market supply for good x
5. Determine the equilibrium price and quantity in the market for good x
6. Is the market currently in long-run equilibrium? Why or why not?

Home’s demand curve for bananas is D = 100 – 2P and its supply curve for bananas is S = 20 + 2P. Home is one of the largest banana importers in the world. When trade opens up, Home’s import demand curve is MD = 90 – 5P and it faces an export supply curve given by XS = 5P – 10. (6)

A) With free trade, determine the equilibrium price and trade volume

B)) Now Home imposes an ad valorem tariff of 20% on banana imports. Determine the new trade volume and the new world price under the tariff. How do you think Home’s welfare has changed? Drawing a diagram showing free trade and tariffs would be helpful.