Principles of Economics 2e
2nd Edition
ISBN: 9781947172364
Author: Steven A. Greenlaw; David Shapiro
Publisher: OpenStax
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Textbook Question
Chapter 11, Problem 10SCQ
What might some of the negatives of deregulation be?
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6. Rent seeking
The following graph shows the demand, marginal revenue, and marginal cost curves for a single-price monopolist that produces a drug that helps
relieve arthritis pain.
Place the grey point (star symbol) in the appropriate location on the graph to indicate the monopoly outcome such that the dashed lines reveal the
profit-maximizing price and quantity of a single-price monopolist. Then, use the green rectangle (triangle symbols) to show the profits earned by the
monopolist.
18
200
20
16
16
14
PRICE (Dollars per dose)
12
10
10
8
4
2
MC = ATC
MR
Demand
0
0
5
10
15
20 25 30
35 40
45
50
QUANTITY (Millions of doses per year)
Monopoly Outcome
Monopoly Profits
Suppose that should the patent on this particular drug expire, the market would become perfectly competitive, with new firms immediately entering
the market with essentially identical products.
Further suppose that in this case the original firm will hire lobbyists and make donations to several key politicians to extend its…
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
Chapter 11 Solutions
Principles of Economics 2e
Ch. 11 - Is it true that a merger between two films that...Ch. 11 - Is it true that the four-firm concentration ratio...Ch. 11 - Some years ago. two intercity bus companies,...Ch. 11 - As a result of globalization and new information...Ch. 11 - Why would a firm choose to use one or more of the...Ch. 11 - Urban transit systems, especially those with rail...Ch. 11 - From the graph you drew to answer Exercise 11.6,...Ch. 11 - What real world changes made the deregulation...Ch. 11 - What are some of the benefits of the deregulation?Ch. 11 - What might some of the negatives of deregulation...
Ch. 11 - What is a corporate merger? What is an...Ch. 11 - What is the goal of antitrust policies?Ch. 11 - How do we measure a four-firm concentration ratio?...Ch. 11 - How do we measure a Herfindahl—Hirshman Index?...Ch. 11 - Why can it be difficult to decide what a market is...Ch. 11 - What is a minimum resale price maintenance...Ch. 11 - What is exclusive dealing? How might it reduce...Ch. 11 - What is a tie-in sale? How might it reduce...Ch. 11 - What is predatory pricing? How might it reduce...Ch. 11 - If public utilities are a natural monopoly, what...Ch. 11 - If public utilities are a natural monopoly, what...Ch. 11 - What is cost-plus regulation?Ch. 11 - What is price cap regulation?Ch. 11 - What is deregulation? Name some industries that...Ch. 11 - What is regulatory capture?Ch. 11 - Why does regulatory capture reduce the...Ch. 11 - Does either the four-firm concentration ratio or...Ch. 11 - What would be evidence of serious competition...Ch. 11 - Can you think of any examples of successful...Ch. 11 - If you were developing a product (like a web...Ch. 11 - In the middle of the twentieth century, major U.S....Ch. 11 - Why are urban areas willing to subsidize urban...Ch. 11 - Deregulation, like all changes in government...Ch. 11 - Do you think it is possible for government to...Ch. 11 - Use Table 11.5 to calculate the four-firm...Ch. 11 - Use Table 11.5 and Table 11.6 to calculate the...Ch. 11 - If the transit system were allowed to operate as...Ch. 11 - If the transit system were regulated to operate...Ch. 11 - If the transit system were regulated to provide...
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