Price escalation is a major pricing problem for the international marketer. Explain the concept of price escalation, and discuss two factors that could contribute to making the price of a product much higher in an international market than in the domestic market. Suggest and explain one method an international marketer could use to counteract price escalation.

What are the pros and cons of using price ceilings and price floors. Why would a government choose to use price ceilings and price floors? Why would economists argue against their use?

4. Determinants of the price elasticity of demand

Consider some determinants of the price elasticity of demand:

A good with many close substitutes is likely to have relatively   demand, because consumers can easily choose to purchase one of the close substitutes if the price of the good rises.

A good’s price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the least elastic demand?

Yacht

Chemotherapy for cancer patients

Price elasticity for a good depends on the share of a consumer's budget spent on a good. Other things being equal, which of the following goods has the most elastic demand?

TV and Internet service plan

Lightbulbs

Toothbrush

The price elasticity of demand for a good also depends on how you define the good.

Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that falls in between.

The price elasticity of demand is also affected by the given time horizon.

Other things being equal, the demand for natural gas will tend to be   elastic in the short run than in the long run.

We also discussed that the difference between a spot price and a futures price (i.e. the basis) for storable commodities should be given primarily by cost of carry and transportation cost. Let us say that the spot price for corn in Lincoln is $3.45/bu, while the futures price for May delivery is $3.82/bu. Now let us assume that the cost of carry is $0.03/bu/month, while the transportation cost between Lincoln and the delivery area of the futures market is $0.20/bu. Based on these costs for carry and transportation, does it make sense to have the basis given by the spot and futures prices above? Why? Explain in detail, step-by-step, what will happen with the spot price, futures price, and the basis.

A. What is Price of a European Put option?

B. Price of a European Call option?

Spot price = $60

Strike Price = $44

Time to expiration = 6 months

Risk Free rate = 3%

Variance = 22% (use for volatility)

Show steps/formula

Consider the following situations where the market price is not equal to the equilibrium price:

• Suppose the price of the good is set at $3. Calculate the size of the surplus or shortage.
• Suppose that the price of the good is set at $7. Calculate the size of the surplus or shortage.

Consider a 1-year forward contract on a stock with a price of $51. The current price of the stock is $50. A cash dividend payment of $2 per share is anticipated in 9 months. The interest rate is 3% per annum with continuously compounding. Assume that there are no transaction costs.

(a) Determine the fair price and the initial value of the forward contract today.

(b) Is there any arbitrage opportunity? Verify your trading positions taken at each point in time.

(c) After 10 months, the stock price falls 2% and the interest rate remains unchanged. Calculate the value of the forward contract. What is the mark-to-market?

What is the difference between an indicative price like LIBOR and a transaction price like the S&P 500 and why is it important?

Are monopolies indefinitely bad for society? As a price setter, how will a monopolist determine price? Provide specific examples of price discrimination that you have encountered. Do you believe price discrimination is fair?