MICROECONIMICS
5th Edition
ISBN: 9781319372101
Author: KRUGMAN
Publisher: MAC HIGHER
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Question
Chapter 10A, Problem 2P
To determine
To use:
The four properties of indifference curve for ordinary goods in the following situations.
Concept Introduction:
Indifference curve: The indifference curve is a line showing all possible combinations of two goods which give the consumers equal satisfaction. In other words the consumer would be indifferent in these points.
Properties of Indifference curve: There are four principles of indifference curves and they are (a) the indifference curves are convex to the origin, (b) the indifference curve do not intersect each other, (c) the indifference curves are downward sloping and (d) the indifference curves do not intersect each other.
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Students have asked these similar questions
Consider a call option on a stock that does not pay dividends.
The stock price is $100 per share, and the risk-free interest rate is 10%.
The call strike is $100 (at the money).
The stock moves randomly with u=2 and d=0.5.
1. Write the system of equations to replicate the option using A shares and B bonds.
2. Solve the system of equations and determine the number of shares and the number of bonds
needed to replicate the option. Show your answer with 4 decimal places (x.xxxx); do not
round intermediate calculations. This is easy to do in Excel.
A =
B =
3. Use A shares and B bonds from the prior question to calculate the premium on the option.
Again, do not round intermediate calculations and show your answer with 4 decimal places.
Call premium =
Answer these questions using replication or the risk neutral probability. Both methods will
produce the same answer.
Show your work to receive credit.
6. What is the premium of a call with a higher strike.
Show your work to receive credit; do not round intermediate calculations.
S0 = $100, u=2, d=0.5, r=10%, strike=$150
Answer these questions using replication or the risk neutral probability. Both methods will produce the same answer.
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