A firm currently sells its product with a 2% discount to customers who pay by cash or credit card when they purchase one of the firm's products; otherwise, the full price is due within 30 days. Forty percent (40%) of customers take advantage of the discount. The firm plans to drop the discount so the new terms will simply be net 30. In doing so it expects to sell 100 fewer units per month and all customers to pay at day 30. The firm currently sells 1,000 units per month at a cost per unit of $40 and a selling price per unit of $80. If the firm's required return is 2%, what is the net present value (NPV) of making this change? (Assume that all 1,000 units are sold at the beginning of the month and the cost of producing the units is paid immediately.)

1. Assume the market demand function is D(P)=100 – P and the firm cost function is C(q)= 20q. The industry is populated by many small firms that offer identical products. In the absence of regulation, a competitive equilibrium would be achieved. However, regulation is in place and requires that a firm’s price be at least as great as 30. Derive the effect of regulation on quantity, firm profits, and social welfare.

2. Now think that the industry is deregulated. What is the price and quantity after deregulation? Does social welfare increase of decrease? What is the impact for firm’s profits? How much do you think those firms are ready to spend on political lobbying (called rent seeking activities by economic jargon) to stop deregulation? Can you think of any example similar to this situation in today’s US?

2. Consider a market where the demand is given by Y = 2 400 - 200p (i.e., the inverse demand is p = 12 – 0.005Y).

a) Assume for the moment that this market is perfectly competitive. In the short run, there

are 50 identical firms operating in this market with cost function c (yi) = 0.25y^2 +100. Find an individual firm's supply function, the industry supply function, the market price and the total quantity sold in the market, the individual firm's level of production, and the individual firm's profit.

(b) Assume that this market is a monopoly instead. The monopoly has a marginal cost function of MC (y) = 0.01y and a fixed cost of F = 1 000. Find the monopoly's marginal revenue, the monopoly quantity and price, the monopoly profit, and the dead weight loss caused due to the monopoly. Draw a graph to demonstrate the dead weight loss.

1) Donald puts up $15,000 but borrows an equal amount of money from his broker to double the amount invested to $30,000. The broker charges 5% on the loan. The stock was originally purchased at $20 per share, and in 1 year the investor sells the stock for $22. The investor's rate of return was ____.

2)

You are bearish on Apple and decide to sell short 100 shares at the current market price of $30 per share.

a. How much in cash or securities must you put into your brokerage account if the broker’s initial margin requirement is 50% of the value of the short position?

b. How high can the price of the stock go before you get a margin call if the maintenance margin is 30% of the value of the short position? (Round your answer to 2 decimal places.)

1. Suppose that the quantity demanded of visits to a doctor per year is given by 10X = 120 - (1/2)P   where X is the number of visits and P is the price the patient pays for a visit.

1. How many visits would the patient make if he or she had to pay the full price of a visit, $100?
2. How many visits would a patient make if he or she was insured and had to pay only a 20% co-insurance payment per visit?
3. How many visits would a patient make if he or she was insured and had to pay only a 15% co-insurance payment per visit?
4. How many visits would the patient make if medical services were free?
5. Comment on the role of copay on the number visits made.

Consider a short straddle constructed from options on 3M stock which have an expiration date of June 21, 2019 (the third Friday in June). The following table displays the only possible prices of 3M stock on June 21, as well as the payoffs accruing to someone who holds a short straddle on the stock:

A short straddle is created using two options. For each option in the short straddle above, indicate whether it is a put or a call, whether it is bought or sold, and what its strike price is. What is the maximum possible loss on this short straddle? What is the maximum possible loss on a real short straddle?

Explain your answer to all of the above questions

1. You are given the following information about copper in the United States:

INCLUDE CALCULATIONS FOR THE FOLLOWING: (Please)

a. Calculate the loss to US consumers of copper from imposing the tariff.
b. Calculate the gain to US producers of copper from imposing the tariff.
c. Calculate the gain in tariff revenue to the US government from imposing the tariff.
d. Calculate the net gain or loss to the US economy as a whole from imposing the tariff.

1. The owner and manager of a duplicating service near a major university, is contemplating keeping his shop open in the evening until midnight. In order to do so, he would have to hire additional workers. He estimates that the additional workers would generate the following total output (where each unit of output refers to 100 pages duplicated). If the price of each worker hired must be paid $150 and the price of each unit of output duplicated is $10, how many workers should he hire?

Workers Hired   0 1           2              3              4              5              6

Total Product     0 22           46           70           92           103         108                                                                        

To work this problem you will need to calculate the MRP values and then compare them to the MRC.

You are bullish on Amazon’s stock (AMZN) which is currently selling for $1596.50. You have decided to buy a 6-month call option with a strike price of $1,625. It costs $50.60 per share to buy the option. Assume the 6-month risk-free rate is 1% per annum with continuous compounding.

1. Draw the profit and payoff function for the long call option at expiration? (Provide labels for the axes and label a point on the functions above, below and at the strike)

2. Note each contract is for 100 call options. Calculate what the payoff and profit at

   expiration is if the spot price is _______. i. $1,550

   ii. $1,600 iii. $1,675.60

3. Draw the profit and payoff function for the short call option at expiration? (Provide labels for the axes and label a point on the functions above, below and at the strike)

A 30-year maturity bond making annual coupon payments with a coupon rate of 12% has a duration of 11 years and convexity of 100. The bond currently sells at a yield to maturity of 8%. The actual price of the bond as a function of yield to maturity is:

Yield to maturity           Price

7%                             $1,620.45

8%                             $1,450.31

9%                             $1,308.21

1. What prices for the bond would be predicted by the duration rule if the yield falls to 7%? What is the percentage error for the duration rule compared to the actual change?
2. What prices for the bond would be predicted by the duration-convexity rule if yield increases to 9%? What is the percentage error for the duration-convexity rule compared to the actual change?

The duration-convexity formula is given by

∆P/P=-Modified Duration×∆y+0.5×Convexity×(∆y)2