EBK ECONOMICS TODAY
18th Edition
ISBN: 9780133920116
Author: Miller
Publisher: YUZU
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Question
Chapter 23, Problem 23.1LO
To determine
The characteristics of a
Expert Solution & Answer
Explanation of Solution
Perfectly competitive market is the market in which there are a large number of buyers and sellers. Each buyer and seller individually has no control over the market. The market forces determine the market
Following are the features of a perfectly competitive market.
a. Free entry and exit: In a perfectly competitive market, there is no restriction on firm’s market entry and exit. If the existing firms make profits, then new firms will enter the market. On the other hand, a firm can freely exit the market if it incurs losses.
b. Large number of buyers and sellers: In a perfectly competitive market, there are a large number of buyers and sellers. Each buyer and seller has no influence over market price of the good.
c. Homogeneous goods: The products produced and sold by a perfectly competitive firm are identical. This means that products of a perfectly competitive firm are perfect substitutes for each other.
d. Perfect knowledge: The buyers and sellers in a perfectly competitive market have perfect market information. This means buyers and sellers have complete information about the price prevailing in the market.
e. Perfect mobility of factors of production: In a perfectly competitive market, factors of production are completely mobile leading to factor-price equalization throughout the market.
Economics Concept Introduction
Introduction:
Perfectly competitive market is the market in which there are a large number of buyers and sellers. Each buyer and seller individually has no control over the market. The price in this market is determined by
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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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