practicefinal2004

practicefinal2004 - PART A: Answer 5 of 7 questions. Each...

This preview shows pages 1–6. Sign up to view the full content.

PART A: Answer 5 of 7 questions .Eachquest ionisworth6marks . Provide short, clear answers to the following: 1. Sarah has been given the following choice of inheritance packages by her parents: Package A is composed of \$20 , 000 today and \$70 , 000 one year from today. Package B is composed of \$60 , 000 today and \$35 , 000 one year from today. Sarah considers both of the choices and decides that she prefers package B to package A .Whena sk ed her reasoning, she explains that by borrowing or lending at the current interest rate, r , package B is equivalent to a f xed payout of \$50 , 000 in each year (today and one year from now), while package A only gives her \$40 , 000eachyear .Drawagraphtoshow how Sarah is making her choice and explain whether comparing the present value of the two packages would lead to the same conclusion. Determine the interest rate r. 1

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
2. Draw a graph that shows the (gross) payo f of a call option with strike price K at maturity T as a function of the stock price at time T ( S T ) . Suppose the current market price of the stock is S t <K and the call option has a price C t > 0 . Explain why the value of the option is positive even though the strike price is greater than the current stock price, S t . 3. Describe the ‘lemons’ problem in the used car market. How can the use of a warranty help to solve the problem. 2
4. A monopolist sets a single price, P M in a market with two types of consumers. At price P M the low-demand consumers do not purchase the good. Explain how surplus will change if the monopolist can price discriminate in the market. (Look at the e f ects of discrimination on the consumer surplus of both types, the producer surplus and the total surplus). 5. Given a duopoly market where f rms compete in quantities, explain why the Cournot equilibrium seems like a reasonable equilibrium in the market. Starting at any arbitrary output for both f rms ( q 1 ,q 2 ) , use a graph to argue why f rm swou ldendupa tthe Cournot equilibrium. 3

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
6. Find a Nash equilibrium to the following game: II LR IU( 4 , 7) (8 , 3) M( 2 , 11) (6 , 6) D( 5 , 2) (2 , 5) 4
7. If a bond will provide a certain payment of C = \$100 every year in perpetuity ( t = 1 , 2 , 3 ,... )aswe l lasaonet imepaymento f D =\$500 f ve years from now ( t =5) ,at what price, P B 0 should this bond trade today, ( t = 0) if the discount rate is r =12%?

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/21/2010 for the course STATISTICS Stat 200 taught by Professor Eee during the Spring '10 term at The University of British Columbia.

Page1 / 21

practicefinal2004 - PART A: Answer 5 of 7 questions. Each...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online