A. What would happen in the options market if the price of an American call were
less than the value Max (0, S0 − X)? Would your answer differ if the option were
European? Explain.
B. Critique the following statement made by an options investor in American call
option: “My call option is very deep in-the-money. I don’t see how it can go any
higher. I think I should exercise it.”
C. Why do higher interest rates lead to higher call option prices but lower put option
prices?
D. Suppose a European put price exceeds the value predicted by put–call parity. How
could an investor profit? Demonstrate that your strategy is correct by constructing
a payoff table showing the outcomes at expiration.
E. Consider a two-period, two-state world. Let the current stock price be 45 and the
risk-free rate be 5 percent. Each period the stock price can go either up by 10 percent
or down by 10 percent. A call option expiring at the end of the second period has
an exercise price of 40.
1. Find the stock price sequence.
2. Determine the possible prices of the call at expiration.
3. Find the possible prices of the call at the end of the first period.
4. What is the current price of the call?

16. When an airline is able to use the elasticity of demand to set different prices for different groups of travelers, this is an example of ____ price discrimination

(a) first degree
(b) second degree

(c) third degree

(d) peak
(e) natural

17. Which statement regarding price discrimination is FALSE?

(a) Price discrimination is always socially inefficient.

(b) It requires different prices to be able to be set for the same product or service.

(c) It converts consumer surplus into producer surplus.

(d) Peak load pricing is a form of price discrimination.

(e) Total output can increase compared to when there is no price discrimination.

18. If a market is monopolistically competitive, then:

A. the goods and services are perfect complements.
B. a firm has a high amount of market power.
C. competition reduces a firm’s demand, but each firm has some market power.

D. price will be set equal to marginal cost to determine each firm’s output.
E. each firm has perfectly elastic demand.

19. Game theory is not useful in understanding perfect competition because:

(a) perfectly competitive firms are honest and don’t play games with each other.

(b) there are too many players and they can’t be identified properly.

(c) it is too hard to figure out their strategy as there are too many players.

(d) it is assumed perfectly competitive firms are unable to influence price.

(e) the payoffs, choices, and prices are not known.

1) An autarkic country has a production possibility curve with constant opportunity costs such that it can produce at most 210 units of silk, or at most 70 units of kerosene. Suppose this country is currently producing 56 units of kerosene and 42 units of silk, and decides instead to produce 69 units of silk; how much kerosene will it produce?___

2) Consider the production possibility curves for England and Portugal. Each country can produce cloth or wine. England can produce at most 10 units of cloth or at most 10 units of wine. Portugal can produce at most 4 units of cloth or 8 units of wine. Which country has a comparative advantage in the production of wine?

1. England
2. Portugal

3. The Excess Capacity theorem asserts that because a monopolistic competitor produces an output that is smaller than what it would to minimize costs of production, and therefore has

1. no right to export its good.
2. excess capacity.
3. a tendency to charge a price that is less than average total cost.
4. an incentive to lobby for lower import tariffs.

4. A monopolist that practices first degree price discrimination

1. charges the highest price each buyer is willing to pay.
2. charges one price for a certain quantity, and another price for a different quantity.
3. charges a different price depending on the type of buyer.
4. charges a random price for each buyer.

Assume a duopoly (firms 1 & 2) has the following demand:

          P = 100 - 0.5 (q₁ + q₂) where

          q₁ and q₂ are outputs for firm 1 and 2 respectively.

     The cost functions are as follows:

          c₁ = 5q₁

          and c₂ = 0.5q₂²

1.   If the firms maximize individual profits (Cournot solution):

     (i) How much will each firm produce? Be sure to state each firm’s reaction function.

     (ii) How much profit does each firm make?

     (iii) What are the industry’s total output and market price?

2.   If the above firms collude and maximize industry profits:

     (i) How much will each firm produce?

     (ii) What are the industry output and market price?

     (iii) What is the industry profit?

     (iv) How do your results in part (2) compare with those obtained in part (1)? Explain.

Contribution Margin with Resource Constraints. CyclePath Company produces two different products that have the following price and cost characteristics.

Management believes that pushing sales of the Bicycle product would maximize company profits because of the high contribution margin per unit for this product. However, only 50,000 labor hours are available each year, and the Bicycle product requires 4 labor hours per unit while the Tricycle model requires 2 labor hours per unit. The company sells everything it produces.

Required:

Calculate the contribution margin per unit of constrained resource for each model.

Which model would CyclePath prefer to sell to maximize overall company profit? Explain.

Kountry Kitchen has a cost of equity of 10.8 percent, a pretax cost of debt of 6.3 percent, and the tax rate is 35 percent. If the company's WACC is 9.01 percent, what is its debt–equity ratio?

2.75

.36

1.33

.27

.49

Western Electric has 26,500 shares of common stock outstanding at a price per share of $68 and a rate of return of 13.55 percent. The firm has 6,750 shares of 6.70 percent preferred stock outstanding at a price of $89.50 per share. The preferred stock has a par value of $100. The outstanding debt has a total face value of $371,000 and currently sells for 105.5 percent of face. The yield to maturity on the debt is 7.75 percent. What is the firm's weighted average cost of capital if the tax rate is 39 percent?

10.20%

11.01%

10.63%

10.43%

11.43%

On January 1, 2015, Xeon Co. issued 15-year callable and convertible bonds with a face value of $2,000,000 and a stated interest rate of 10%, payable semiannually on July 1 and January 1. The bonds were sold to yield 12%.

1. Calculate the issue price of the bond in dollars
2. Calculate the issue price of the bonds as a percentage
3. Make the journal entry to record the issuance of the bond on January 1, 2015
4. Prepare the amortization table for the years 2015 & 2016
5. Make the journal entries for 2016
6. How much was the interest expense for 2016?
7. On December 31, 2016 $600,000 of the bonds were retired at 103. Make the journal entry to record the retirement
8. On December 31, 2016 $800,000 of bonds were converted into $2 par value common stock. Each bond is convertible into 100 shares of stocks. Make the journal entry to record the conversion

An economy produces two goods: food and ovens. There are 50 workers, each of whom can produce 100 units of food OR 1 oven in a year. Wages are $800 per worker per year. The price of a unit of food is $10, and the price of an oven is $1000. Currently, 30 workers produce food and the rest produce ovens. The government buys 200 units of food a year. There is no depreciation or ROW sector in this economy. a. Calculate the level of consumption, investment and government expenditures, and national product in this economy. b. What are the sales, costs, profits, investments, and dividends? c. Assume that no profits are distributed to the households. The government taxes the income of households only at 10%. Calculate the tax revenue, and write down the budget of the government. Is the government running a deficit or a surplus? d. Show that national income = national product in this economy e. Write down the national Savings =Net Investment relationship and verify it.

2.a. How will a rise in the wage of labor affect a firm's short run marginal cost curve (assume labor is the input that can be varied in the short run).

b. Would you expect the rise in the wage to have a smaller effect on short run or long run marginal costs? Why?

c. Suppose a firm's production function is Q = (KL)^0.5. In the short run, this firm's capital stock is fixed at 100.

            i. Calculate the firm's short run total cost curve if w = 5 and v = 5.

            ii. It can be shown (using calculus) that this firm's short run marginal costs are .1Q. In

            order to maximize its profits, how much would the firm choose to produce if the market

            price of its output was $5, $10, or $20. For each price, calculate the firm's profits and

            indicate whether Q = 0 might be preferred.

. The (inverse) equations for the supply and demand for French Champagne are given below. Supply: P = 40 + ¼Q Demand: P = 100 – ½Q [Half point for each question]

a) compute the equilibrium price and quantity of Champagne.

b) Suppose and excise tax (i.e. a tax paid by producers) of $18 per bottle is imposed. What are the equations for the new supply and demand curves? What is the new EQ price and quantity? Specify what the prices paid by consumers and received by producers are?

c) Do the same as (b) for a sales tax (i.e. a tax paid by consumers) of $18 per bottle and explain whether the burden has shifted from producers to consumers along with the incidence of the tax from excise to sales.

d) Calculate the Consumer Surplus and Producer Surplus before and after the tax is put into place. How much revenue is raised? Calculate any deadweight loss from the tax.