Microeconomics
10th Edition
ISBN: 9781259655500
Author: David C Colander
Publisher: McGraw-Hill Education
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Question
Chapter 19, Problem 1QE
To determine
The difference between
Expert Solution & Answer
Explanation of Solution
Marginal utility refers to the additional unit of fraction derived from the consumption of one or more additional units of goods and services. The total utility refers to the total satisfaction of a person, which derives from the consumption of various units of a commodity.
Marginal utility first rises and then declines due to the working of the law of diminishing marginal utility, which states that as a person goes on consuming more and more units of the same commodity, his satisfaction increases and then starts declining. This is why the marginal utility first rises and then declines.
Economics Concept Introduction
Total utility: Total utility refers to the total satisfaction derived by a person from the consumption of overall unit of a commodity.
Marginal utility: Marginal utility refers to the additional utility derived by a person from an additional unit of commodity.
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Students have asked these similar questions
5. Some people find options expensive and use more complex structures to reduce the cost. For
example, consider buying a call with a strike of $55 and selling a call with a strike of $60.
a. What is the cost of establishing this combined position?
b. What is the payoff of the combined position if the market price goes to $60?
c. What is the payoff of the combined position if the market price goes to $100?
3. An investor has $1,000 to invest. They believe the price of the underlier will increase to $60
within one year.
a. How many shares of stock could they buy with the $1,000 at the current price of $50,
and how much would they make if the share price increased to $60?
b. How many calls with a strike of $55 could they buy for the same $1,000, and how
much would they make if the share price increased to $60?
c. How much would they make (or lose) from the stock and from the calls if the share
price declined to $40?
4. What is the premium on a call with a strike of $0.01? Why is the premium so close to the $50
share price?
1. We want to examine the comparative statics of the Black Scholes model. Complete the
following table using the Excel model from class or another of your choice. Provide the call
premium and the put premium for each scenario.
Underlier
Risk-free
Scenario
price
rate
Volatility
Time to
expiration
Strike
Call
premium
Put
premium
Baseline
$50
5%
25%
1 year
$55
Higher strike
$50
5%
25%
1 year
$60
Higher volatility
$50
5%
40%
1 year
$55
Higher risk free
$50
8%
25%
1 year
$55
More time
$50
5%
25%
2 years
$55
2. Look at the baseline scenario.
a. What is the probability that the call is exercised in the baseline scenario?
b. What is the probability that the put is exercised?
c. Explain why the probabilities sum to 1.
Chapter 19 Solutions
Microeconomics
Ch. 19.1 - Prob. 1QCh. 19.1 - Prob. 2QCh. 19.1 - Prob. 3QCh. 19.1 - Prob. 4QCh. 19.1 - Prob. 5QCh. 19.1 - Prob. 6QCh. 19.1 - Prob. 7QCh. 19.1 - Prob. 8QCh. 19.1 - Prob. 9QCh. 19.1 - Prob. 10Q
Ch. 19.A - Prob. 1QECh. 19.A - Prob. 2QECh. 19.A - Prob. 3QECh. 19.A - Prob. 4QECh. 19 - Prob. 1QECh. 19 - Prob. 2QECh. 19 - Prob. 3QECh. 19 - Prob. 4QECh. 19 - Prob. 5QECh. 19 - Prob. 6QECh. 19 - Prob. 7QECh. 19 - Prob. 8QECh. 19 - Prob. 9QECh. 19 - Prob. 10QECh. 19 - Prob. 11QECh. 19 - Prob. 12QECh. 19 - Prob. 13QECh. 19 - Prob. 14QECh. 19 - Prob. 15QECh. 19 - Prob. 16QECh. 19 - Prob. 1QAPCh. 19 - Prob. 2QAPCh. 19 - Prob. 3QAPCh. 19 - Prob. 4QAPCh. 19 - Prob. 5QAPCh. 19 - Prob. 1IPCh. 19 - Prob. 2IPCh. 19 - Prob. 3IPCh. 19 - Prob. 4IPCh. 19 - Prob. 5IPCh. 19 - Prob. 6IPCh. 19 - Prob. 7IPCh. 19 - Prob. 8IPCh. 19 - Prob. 9IPCh. 19 - Prob. 10IP
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