## Include workings. (2) Extemalities (10 pts) Like under Question (I), assume the private demand curve (private marginal utility) for automobile trips is given by P=ZUfU-3Q.

Include workings. (2) Extemalities (10 pts)
Like under Question (I), assume the private demand curve (private marginal utility) for automobile trips is given by P=ZUfU-3Q. The private supply curve (private marginal cost curve)
W P stands for the price of gasoline and Q for vehicles miles driven. a) Calculate the private equilibrium b) Now assume the external cost instead of being constantly 50 per unit, it always equals 20% of
the private MC. is the socially optimal quantity? c) is the DWL of the private solution? d) Assume the city were to impose a Pigou Tax on the supply side. is the tax (\$lunit) at the
privately optimal quantity? is the tax (\$lunit) at the socially optimal quantity? 1. (35) Consider a variation of the Glosten-Milgrom sequential trade model where the asset’s value V can take three values. Suppose that the true value of stock in Trident Corporation can be, with equal probability, either VH : %, VL : i, or some middle value VM. Let a: : % of the traders be informed insiders, while the remaining 1 — o: : g are uninformed noise traders. Assume as always that informed traders always buy when V = VH and sell when V = VL, while uninformed
traders buy or sell with equal probability. The focus of this problem is the traders’ behavior when V 2 VM .
(a) (5) Draw the tree diagram, leaving uncertain the action of informed traders when V 2 VM .
(b) (5) Show that there is no value of VM for which informed traders randomize between buying and selling.
(c) (10) Suppose that informed traders always buy when V 2 VM . i. (3) Calculate the conditional probabilities of a buy order at each value V can take and the uncondi-
tional probability of a buy. ii. (3) Using Bayes’ rule, calculate the posterior probabilities of V taking on each value conditional on
a buy, and compute the ask price as a function of VM . iii. (4) Find the informed trader’s payoff when V 2 VM and use this to ﬁnd the lowest value of VM at
which the trader is willing to buy. (d) (10) Now suppose the informed traders always sell when V 2 VM . i. (3) Calculate the conditional probabilities of a sell order at each value V can take and the uncondi-
tional probability of a sell. ii. (3) Using Bayes’ rule, calculate the posterior probabilities of V taking on each value conditional on
a sell, and compute the bid price as a function of VM . iii. (4) Find the informed trader’s payoff when V 2 VM and use this to ﬁnd the highest value of VM at
which the trader is willing to sell. (e) (5) happens if VM satisﬁes neither of the bounds you found above? 2. Consider a firm that produces 10 units of gold a year from today. The price of gold next year, ST, is
normally distributed with mean 100 and volatility of 20%. The firm knows that there will be a buyer
who is willing to pay the price of 90 per unit, no matter what the value of S is. At T = 1, the firm
can choose whether to sell to this buyer or at the market price of ST.
Firm cash flows are taxed at a flat rate of 7 = 30%. The risk-free rate is Ap = 5% and is compounded
(a) [2 points] Express the before-tax cash flows of the (unhedged) firm as a function of the gold spot
price Sp. In particular, if we write it as a + b . max{Sy -90,0}, what are the values of a and b?
(b) [2 points] Now suppose that there is a call option on gold whose strike price is 90. The premium
of this option is 17. The firm decides to sell this call option to perfectly hedge its cash flow risk.
If the proceeds from selling these options are invested in the risk-free asset and added to the firm
profit in one year, what is the before-tax payoff of the hedged firm in one year?
(c) [1 point] is the present value of the cash flows of the hedged unlevered firm after taxes?
(d) [3 points] If the hedged firm above issues the maximum amount of safe debt D to take advantage
of the fact that the interest payments are tax deductible, what is the total value of the hedged
levered firm after tax? How does it compare with your answer above, and why?

## eco qwr… answer … show calculations Problem 1 This is a non-math question about Ricardian equivalence. Imagine a two period economy with two types of

eco qwr… answer … show calculations Problem 1
This is a non-math question about Ricardian equivalence. Imagine a two period economy
with two types of agents: lenders and borrowers. Both have the same preferences and like
to smooth consumption, but they differ in their income endowment of a perishable good.
Lenders have a lot of income in the first period, and very little in the second. Borrowers
have very little income in the first period but a lot in the second. There is a government
who is running a balanced budget (taxing the same amount from both types).
(a) If they can trade a riskless bond, who would lend to whom?
(b) Now assume agents cannot borrow (can consume at most their after tax income).
For whom is this constraint binding? Do you expect the interest rate to be higher or lower?
The government now decides to lower taxes in the first period by A (keeping total
expenditures fixed)
(c) For a given interest rate, how does this affect savings for lenders? and for borrowers?
and aggregate savings (including the government )?
(d) do you expect will happen to the equilibrium interest rate?
Problem 2
Suppose that households change their preferences so that they wisk to work and consume
more in each year.
(a) Show graphically the effects of this change on the labor market. happens to
labor input L, and the real wage, ;?
(b) Show graphically the effects of this change on the market for capital services.
happens to the real rental price, ? happens to the interest rate, i?
(c) happens to consumption, C, and investment, I? happens over time to
the stock of capital, K?
Problem 3
Assume a one-time decrease in the capital stock, K, possibly caused by a natural disaster
or war. Assume the population does not change.
(a) Show graphically the effects of this change on the market for capital services.
happens to the real rental price, #? happens to the interest rate, i?
(b) Show graphically the effects of this change on the labor market. happens to
labor input L, and the real wage, "?
(c) happens to consumption, C, and investment, I? happens over time to
the stock of capital, K? 17.
The current price for a stock index is 1,000. The following premiums exist for various
options to buy or sell the stock index six months from now:
Strike Price
950
120.41
51.78
1,000
93.81
74.20
1,050
71.80
101.21
Strategy I is to buy the 1,050-strike call and to sell the 950-strike call.
Strategy II is to buy the 1,050-strike put and to sell the 950-strike put.
Strategy III is to buy the 950-strike call, sell the 1,000-strike call, sell the 950-strike put,
Assume that the price of the stock index in 6 months will be between 950 and 1,050.
Determine which, if any, of the three strategies will have greater payoffs in six months
for lower prices of the stock index than for relatively higher prices.
None
(B)
I and II only
(C)
I and III only
(D)
II and III only
(E)
The correct answer is not given by (A), (B). (C), or (D)
IFM-01-18
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18.
DELETED
19.
DELETED
20.
The current price of a stock is 200, and the continuously compounded risk-free interest
rate is 4%. A dividend will be paid every quarter for the next 3 years, with the first
dividend occurring 3 months from now. The amount of the first dividend is 1.50, but
each subsequent dividend will be 1% higher than the one previously paid.
Calculate the fair price of a 3-year forward contract on this stock. 15.
The current price of a non-dividend paying stock is 40 and the continuously compounded
risk-free interest rate is 8%. You enter into a short position on 3 call options, each with 3
months to maturity, a strike price of 35, and an option premium of 6.13. Simultaneously,
you enter into a long position on 5 call options, each with 3 months to maturity, a strike
price of 40, and an option premium of 2.78.
All 8 options are held until maturity.
Calculate the maximum possible profit and the maximum possible loss for the entire
option portfolio.
Maximum Profit
Maximum Loss
3.42
4.58
(B)
4.58
10.42
(C)
Unlimited
10.42
(D)
4.58
Unlimited
(E)
Unlimited
Unlimited
IFM-01-18
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16.
The current price of a non-dividend paying stock is 40 and the continuously compounded
risk-free interest rate is 8%. The following table shows call and put option premiums for
three-month European of various exercise prices:
Exercise Price
35
6.13
0.44
40
2.78
1.99
45
0.97
5.08
A trader interested in speculating on volatility in the stock price is considering two
investment strategies. The first is a 40-strike straddle. The second is a strangle
consisting of a 35-strike put and a 45-strike call.
Determine the range of stock prices in 3 months for which the strangle outperforms the
Stock XYZ has a current price of 100. The forward price for delivery of this stock in 1
year is 110.
Unless otherwise indicated, the stock pays no dividends and the annual effective risk-free
interest rate is 10%.
Determine which of the following statements is FALSE.
(A) The time-1 profit diagram and the time-1 payoff diagram for long
positions in this
forward contract are identical.
(B)
The time-1 profit for a long position in this forward contract is exactly
opposite to the time-1 profit for the corresponding short forward position.
(C)
There is no comparative advantage to investing in the stock versus
investing in the forward contract.
(D)
If the 10% interest rate was continuously compounded instead of annual
effective, then it would be more beneficial to invest in the stock, rather
than the forward contract.
(E)
If there was a dividend of 3.00 paid 6 months from now, then it would be
more beneficial to invest in the stock, rather than the forward contract.
IFM-01-18
Page 7 of 105
11.
Stock XYZ has the following characteristics:
The current price is 40.
The price of a 35-strike 1-year European call option is 9.12.
.
The price of a 40-strike 1-year European call option is 6.22.
. The price of a 45-strike 1-year European call option is 4.08.
The annual effective risk-free interest rate is 8%.
Let S be the price of the stock one year from now.
All call positions being compared are long.
Determine the range for S such that the 45-strike call produce a higher profit than the 40-
strike call, but a lower profit than the 35-strike call. 12.
Consider a European put option on a stock index without dividends, with 6 months to
expiration and a strike price of 1,000. Suppose that the effective six-month interest rate
is 2%, and that the put costs 74.20 today.
Calculate the price that the index must be in 6 months so that being long in the put would
produce the same profit as being short in the put.
(A)
922.83
(B)
924.32
(C)
1,000.00
(D)
1,075.68
(E)
1,077.17
IFM-01-18
Page 8 of 105
13.
A trader shorts one share of a stock index for 50 and buys a 60-strike European call
option on that stock that expires in 2 years for 10. Assume the annual effective risk-free
interest rate is 3%.
The stock index increases to 75 after 2 years.
Calculate the profit on your combined position, and determine an alternative name for
this combined position.
Profit
Name
(A)
-22.64
Floor
(B)
-17.56
Floor
(C)
-22.64
Cap
(D)
-17.56
Cap
(E)
-22.64
"Written" Covered Call
14.
The current price of a non-dividend paying stock is 40 and the continuously compounded
risk-free interest rate is 8%. You are given that the price of a 35-strike call option is 3.35
higher than the price of a 40-strike call option, where both options expire in 3 months.
Calculate the amount by which the price of an otherwise equivalent 40-strike put option
exceeds the price of an otherwise equivalent 35-strike put option.
(A)
1.55
(B)
1.65
(C)
1.75
(D)
3.25
(E)
3.35

## the marginal propen- sity to consume is higher than economy B. In both economies a fall in aggregate demand has caused an output gap, of

the marginal propen- sity to consume is higher than economy B. In both economies a fall in aggregate demand has caused an output gap, of the same size in both economies, to open up, where before there was no output gap. a) Sketch an AS/AD model that illustrates the change that has taken place in these economies. Explain what your diagram shows. b) The governments of the two economies are considering using discretionary fiscal policy to attempt to close the output gap. does that mean? How will the required policy be different in the two economies? Carefully explain why.

## planos a un arquitecto. La factura de éste asciende a 6.000 €, que le paga el día 31 de marzo tras retenerle el 15% en

planos a un arquitecto. La factura de éste asciende a 6.000 €, que le paga el día 31 de marzo tras retenerle el 15% en concepto de retención a cuenta del IRPF. Ese mismo día paga la primera certificación por las obras de acondicionamiento al constructor por importe 12.000 €. El día 30 de abril paga la segunda certificación al constructor por importe 20.000 € y el Restaurante se pone en funcionamiento. Realiza todos los asientos relacionados con las operaciones anteriores. Ten en cuenta que todas las operaciones descritas estarán sujetas a IVA del 21%.

## Most problems companies face are due to a lack of information; with accurate information, the problems could be solved. Using the CSU Online Library, explore the topic of how research

Most problems companies face are due to a lack of information; with accurate information, the problems could be solved. Using the CSU Online Library, explore the topic of how research is conducted in organizations to address problems or issues. Then, select a company that is of interest to you, and respond to the following questions/topics: 1. Briefly describe your company. Identify potential problems or issues (current or future) that your company might address with a research study. 2. indicators are prevalent demonstrating that the company is effectively (or ineffectively) using research studies within the organization? 3. How might the company use secondary research? How might they use primary research? 4. might this company do in the future to expand its research? Include your rationale. APA 3p.

## The price of a non-dividend paying stock is currently S = 100. Over the next year, it is expected to go up by 25% (u

The price of a non-dividend paying stock is currently S = 100. Over the next year, it is expected to go up by 25% (u = 1.25) or down by 20% (d = 0.80). The risk-free interest rate is r = 5% per annum with continuous compounding. How many units (figures without decimals) of the stock should you include in a portfolio containing a European Put option that gives the right to sell 100 units of the stock at a strike price K = 100 each, for the result of this portfolio to be independent of the price of the stock, in 1-year time?

## 2. Demand across the two locations After talking your managerial economics class, you realize that you can probably raise your profits by price discriminating by

2.
Demand across the two locations
After talking your managerial economics class, you realize that you can probably raise your profits
by price discriminating by charging different prices in the two locations. You then breakdown
sales across the two locations
In Laredo: You sold 200 burger meals per week at \$9 and 100 meals at \$10
In San Antonio: You sold 1200 meals per week at \$9 and 1100 meals at \$10
A. Using the two prices above, estimate your demand function in Laredo. would demand be
at the optimal price from Q1?
B. Using the two prices above, estimate your demand function in San Antonio. would
demand be at the optimal price from Q1? You are running a (small) chain of gourmet burger joints with two locations (San Antonio and Laredo) You have been charging \$9 for your burger meal (fries, burger and soft drink).  Across both locations, you sell 1400 meals per week at this price When you raised the price to \$10 for the burger meal, your sales across the two locations fell to 1200 meals per week. For your costs, you have fixed costs of \$3000 per week across the two locations. In addition, it costs you three dollars in variable costs (ingredients, labor etc.)

## 6. (8 points) Sandford has the utility function u(x, y) = 2Inx + 4/ny defined over positive values of x and y. s preferences are

6. (8 points) Sandford has the utility function u(x, y) = 2Inx + 4/ny defined over
positive values of x and y. s preferences are strongly monotonic and strongly