The market can provide efficient outcomes.

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Answer 1

Question

Chapter 3, Problem 1DQ

Summary Introduction

To determine: The market can provide efficient outcomes.

Expert Solution & Answer

Explanation of Solution

a.

Hurricane insurance and beach houses:

In this insurance market, customers would not expect disproportionate information as it would provide more problems. The probability of a hurricane is unpredictable. In such cases, moral hazard could be an factor of issue; more people will prefer to construct houses near to the beach if they have a proper hurricane insurance. However, people will expect the providers of hurricane insurance to function fairly efficient.

b.

Medical Care:

In medical care, there is considerable uneven information in the markets for insurance consumers and malpractice insurance for doctors. For better consumption, the pricing must be similar to the marginal expenses, and the insurance effect might decrease the perceived pricing for consumption of medicinal care. This could lead to consumption greater than the effective level. Considering the roles of consumption, regulation, taxes, and costs transfers from the uninsured to the insured, there are some purpose to expect the market to be effective.

c.

Stock market:

In this market, there is adequate information and greater number of purchasers and sellers. In this market, we can expect efficient outcomes.

d.

MP3 Players:

From a country point of view, there is a good arrangement of information and competition in regards to music and MP3 players. The outcome of this will likely be effective for MP3 players. However, some companies might try to capitalize on the market power through great brand awareness and proprietary downloading equipment.

e.

Loans for students to attend college:

In this market, private players allocation are probably incompetent without government interference. Student loan markets might get affected from asymmetric information; the student will be able to know about the lenders whether he will repay the loan or not, it can be a method of opposition selection. Government interference do not resolve the opposing selection issue in the give case as participants in the student loan program is not obligatory, however, it might create a market that would not take place without any intervention.

f.

Housing:

This market is likely to be comparatively effective. Some inadequacies may take place, such as asymmetric information, the seller is more informative about the house than the purchaser and differentiated goods. However, the market has improved to alleviate these inadequacies. For instance, purchasers can employ the home inspector to assist him to focus more on the quality. Also, steps to increase more number of homes on the market to increase the competition.

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Problem Three (15 marks) You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $6.00. The dividend is expected to increase by 60%, 45%, 30% and 15% per year, respectively, in the next four years. Thereafter, the dividend will increase by 4% per year in perpetuity. Calculate NEWER’s expected dividend for t = 1, 2, 3, 4 and 5. The required rate of return for NEWER stock is 14% compounded annually. What is NEWER’s stock price? The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 three (3) years from today. The dividend will increase by 30% per year for the following four (4) years after its first dividend payment. Thereafter, the dividend will increase by 3% per year in perpetuity. Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, 6, 7 and 8. The required rate of return for OLDER stock is 16% compounded annually. What is OLDER’s stock price? Now assume that…

Answer 2

Question

Chapter 3, Problem 1DQ

Summary Introduction

To determine: The market can provide efficient outcomes.

Expert Solution & Answer

Explanation of Solution

a.

Hurricane insurance and beach houses:

In this insurance market, customers would not expect disproportionate information as it would provide more problems. The probability of a hurricane is unpredictable. In such cases, moral hazard could be an factor of issue; more people will prefer to construct houses near to the beach if they have a proper hurricane insurance. However, people will expect the providers of hurricane insurance to function fairly efficient.

b.

Medical Care:

In medical care, there is considerable uneven information in the markets for insurance consumers and malpractice insurance for doctors. For better consumption, the pricing must be similar to the marginal expenses, and the insurance effect might decrease the perceived pricing for consumption of medicinal care. This could lead to consumption greater than the effective level. Considering the roles of consumption, regulation, taxes, and costs transfers from the uninsured to the insured, there are some purpose to expect the market to be effective.

c.

Stock market:

In this market, there is adequate information and greater number of purchasers and sellers. In this market, we can expect efficient outcomes.

d.

MP3 Players:

From a country point of view, there is a good arrangement of information and competition in regards to music and MP3 players. The outcome of this will likely be effective for MP3 players. However, some companies might try to capitalize on the market power through great brand awareness and proprietary downloading equipment.

e.

Loans for students to attend college:

In this market, private players allocation are probably incompetent without government interference. Student loan markets might get affected from asymmetric information; the student will be able to know about the lenders whether he will repay the loan or not, it can be a method of opposition selection. Government interference do not resolve the opposing selection issue in the give case as participants in the student loan program is not obligatory, however, it might create a market that would not take place without any intervention.

f.

Housing:

This market is likely to be comparatively effective. Some inadequacies may take place, such as asymmetric information, the seller is more informative about the house than the purchaser and differentiated goods. However, the market has improved to alleviate these inadequacies. For instance, purchasers can employ the home inspector to assist him to focus more on the quality. Also, steps to increase more number of homes on the market to increase the competition.

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Answer 3

Question

Chapter 3, Problem 1DQ

Summary Introduction

To determine: The market can provide efficient outcomes.

Expert Solution & Answer

Explanation of Solution

a.

Hurricane insurance and beach houses:

In this insurance market, customers would not expect disproportionate information as it would provide more problems. The probability of a hurricane is unpredictable. In such cases, moral hazard could be an factor of issue; more people will prefer to construct houses near to the beach if they have a proper hurricane insurance. However, people will expect the providers of hurricane insurance to function fairly efficient.

b.

Medical Care:

In medical care, there is considerable uneven information in the markets for insurance consumers and malpractice insurance for doctors. For better consumption, the pricing must be similar to the marginal expenses, and the insurance effect might decrease the perceived pricing for consumption of medicinal care. This could lead to consumption greater than the effective level. Considering the roles of consumption, regulation, taxes, and costs transfers from the uninsured to the insured, there are some purpose to expect the market to be effective.

c.

Stock market:

In this market, there is adequate information and greater number of purchasers and sellers. In this market, we can expect efficient outcomes.

d.

MP3 Players:

From a country point of view, there is a good arrangement of information and competition in regards to music and MP3 players. The outcome of this will likely be effective for MP3 players. However, some companies might try to capitalize on the market power through great brand awareness and proprietary downloading equipment.

e.

Loans for students to attend college:

In this market, private players allocation are probably incompetent without government interference. Student loan markets might get affected from asymmetric information; the student will be able to know about the lenders whether he will repay the loan or not, it can be a method of opposition selection. Government interference do not resolve the opposing selection issue in the give case as participants in the student loan program is not obligatory, however, it might create a market that would not take place without any intervention.

f.

Housing:

This market is likely to be comparatively effective. Some inadequacies may take place, such as asymmetric information, the seller is more informative about the house than the purchaser and differentiated goods. However, the market has improved to alleviate these inadequacies. For instance, purchasers can employ the home inspector to assist him to focus more on the quality. Also, steps to increase more number of homes on the market to increase the competition.

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Answer 4

Question

Chapter 3, Problem 1DQ

Summary Introduction

To determine: The market can provide efficient outcomes.

Expert Solution & Answer

Explanation of Solution

a.

Hurricane insurance and beach houses:

In this insurance market, customers would not expect disproportionate information as it would provide more problems. The probability of a hurricane is unpredictable. In such cases, moral hazard could be an factor of issue; more people will prefer to construct houses near to the beach if they have a proper hurricane insurance. However, people will expect the providers of hurricane insurance to function fairly efficient.

b.

Medical Care:

In medical care, there is considerable uneven information in the markets for insurance consumers and malpractice insurance for doctors. For better consumption, the pricing must be similar to the marginal expenses, and the insurance effect might decrease the perceived pricing for consumption of medicinal care. This could lead to consumption greater than the effective level. Considering the roles of consumption, regulation, taxes, and costs transfers from the uninsured to the insured, there are some purpose to expect the market to be effective.

c.

Stock market:

In this market, there is adequate information and greater number of purchasers and sellers. In this market, we can expect efficient outcomes.

d.

MP3 Players:

From a country point of view, there is a good arrangement of information and competition in regards to music and MP3 players. The outcome of this will likely be effective for MP3 players. However, some companies might try to capitalize on the market power through great brand awareness and proprietary downloading equipment.

e.

Loans for students to attend college:

In this market, private players allocation are probably incompetent without government interference. Student loan markets might get affected from asymmetric information; the student will be able to know about the lenders whether he will repay the loan or not, it can be a method of opposition selection. Government interference do not resolve the opposing selection issue in the give case as participants in the student loan program is not obligatory, however, it might create a market that would not take place without any intervention.

f.

Housing:

This market is likely to be comparatively effective. Some inadequacies may take place, such as asymmetric information, the seller is more informative about the house than the purchaser and differentiated goods. However, the market has improved to alleviate these inadequacies. For instance, purchasers can employ the home inspector to assist him to focus more on the quality. Also, steps to increase more number of homes on the market to increase the competition.

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Answer 5

Chapter 3, Problem 1DQ

Summary Introduction

To determine: The market can provide efficient outcomes.

Expert Solution & Answer

Explanation of Solution

a.

Hurricane insurance and beach houses:

In this insurance market, customers would not expect disproportionate information as it would provide more problems. The probability of a hurricane is unpredictable. In such cases, moral hazard could be an factor of issue; more people will prefer to construct houses near to the beach if they have a proper hurricane insurance. However, people will expect the providers of hurricane insurance to function fairly efficient.

b.

Medical Care:

In medical care, there is considerable uneven information in the markets for insurance consumers and malpractice insurance for doctors. For better consumption, the pricing must be similar to the marginal expenses, and the insurance effect might decrease the perceived pricing for consumption of medicinal care. This could lead to consumption greater than the effective level. Considering the roles of consumption, regulation, taxes, and costs transfers from the uninsured to the insured, there are some purpose to expect the market to be effective.

c.

Stock market:

In this market, there is adequate information and greater number of purchasers and sellers. In this market, we can expect efficient outcomes.

d.

MP3 Players:

From a country point of view, there is a good arrangement of information and competition in regards to music and MP3 players. The outcome of this will likely be effective for MP3 players. However, some companies might try to capitalize on the market power through great brand awareness and proprietary downloading equipment.

e.

Loans for students to attend college:

In this market, private players allocation are probably incompetent without government interference. Student loan markets might get affected from asymmetric information; the student will be able to know about the lenders whether he will repay the loan or not, it can be a method of opposition selection. Government interference do not resolve the opposing selection issue in the give case as participants in the student loan program is not obligatory, however, it might create a market that would not take place without any intervention.

f.

Housing:

This market is likely to be comparatively effective. Some inadequacies may take place, such as asymmetric information, the seller is more informative about the house than the purchaser and differentiated goods. However, the market has improved to alleviate these inadequacies. For instance, purchasers can employ the home inspector to assist him to focus more on the quality. Also, steps to increase more number of homes on the market to increase the competition.

Answer 6

Chapter 3, Problem 1DQ

Summary Introduction

To determine: The market can provide efficient outcomes.

Expert Solution & Answer

Explanation of Solution

a.

Hurricane insurance and beach houses:

In this insurance market, customers would not expect disproportionate information as it would provide more problems. The probability of a hurricane is unpredictable. In such cases, moral hazard could be an factor of issue; more people will prefer to construct houses near to the beach if they have a proper hurricane insurance. However, people will expect the providers of hurricane insurance to function fairly efficient.

b.

Medical Care:

In medical care, there is considerable uneven information in the markets for insurance consumers and malpractice insurance for doctors. For better consumption, the pricing must be similar to the marginal expenses, and the insurance effect might decrease the perceived pricing for consumption of medicinal care. This could lead to consumption greater than the effective level. Considering the roles of consumption, regulation, taxes, and costs transfers from the uninsured to the insured, there are some purpose to expect the market to be effective.

c.

Stock market:

In this market, there is adequate information and greater number of purchasers and sellers. In this market, we can expect efficient outcomes.

d.

MP3 Players:

From a country point of view, there is a good arrangement of information and competition in regards to music and MP3 players. The outcome of this will likely be effective for MP3 players. However, some companies might try to capitalize on the market power through great brand awareness and proprietary downloading equipment.

e.

Loans for students to attend college:

In this market, private players allocation are probably incompetent without government interference. Student loan markets might get affected from asymmetric information; the student will be able to know about the lenders whether he will repay the loan or not, it can be a method of opposition selection. Government interference do not resolve the opposing selection issue in the give case as participants in the student loan program is not obligatory, however, it might create a market that would not take place without any intervention.

f.

Housing:

This market is likely to be comparatively effective. Some inadequacies may take place, such as asymmetric information, the seller is more informative about the house than the purchaser and differentiated goods. However, the market has improved to alleviate these inadequacies. For instance, purchasers can employ the home inspector to assist him to focus more on the quality. Also, steps to increase more number of homes on the market to increase the competition.

Answer 7

Chapter 3, Problem 1DQ

Summary Introduction

To determine: The market can provide efficient outcomes.

Answer 8

Expert Solution & Answer

Explanation of Solution

a.

Hurricane insurance and beach houses:

In this insurance market, customers would not expect disproportionate information as it would provide more problems. The probability of a hurricane is unpredictable. In such cases, moral hazard could be an factor of issue; more people will prefer to construct houses near to the beach if they have a proper hurricane insurance. However, people will expect the providers of hurricane insurance to function fairly efficient.

b.

Medical Care:

In medical care, there is considerable uneven information in the markets for insurance consumers and malpractice insurance for doctors. For better consumption, the pricing must be similar to the marginal expenses, and the insurance effect might decrease the perceived pricing for consumption of medicinal care. This could lead to consumption greater than the effective level. Considering the roles of consumption, regulation, taxes, and costs transfers from the uninsured to the insured, there are some purpose to expect the market to be effective.

c.

Stock market:

In this market, there is adequate information and greater number of purchasers and sellers. In this market, we can expect efficient outcomes.

d.

MP3 Players:

From a country point of view, there is a good arrangement of information and competition in regards to music and MP3 players. The outcome of this will likely be effective for MP3 players. However, some companies might try to capitalize on the market power through great brand awareness and proprietary downloading equipment.

e.

Loans for students to attend college:

In this market, private players allocation are probably incompetent without government interference. Student loan markets might get affected from asymmetric information; the student will be able to know about the lenders whether he will repay the loan or not, it can be a method of opposition selection. Government interference do not resolve the opposing selection issue in the give case as participants in the student loan program is not obligatory, however, it might create a market that would not take place without any intervention.

f.

Housing:

This market is likely to be comparatively effective. Some inadequacies may take place, such as asymmetric information, the seller is more informative about the house than the purchaser and differentiated goods. However, the market has improved to alleviate these inadequacies. For instance, purchasers can employ the home inspector to assist him to focus more on the quality. Also, steps to increase more number of homes on the market to increase the competition.