Exploring Macroeconomics
8th Edition
ISBN: 9781544363332
Author: Robert L. Sexton
Publisher: Sage Publications
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Chapter 3, Problem 1P
To determine
The three basic economic questions.
Expert Solution & Answer
Explanation of Solution
The three basic economic questions that every economy face is:
- What to produce?
- How to produce?
- Whom to produce?
In the planned economy (command economy) the central economic questions what, how and whom to produce is resolved by the central planned authority or the government. The government controls all the factors of production (land, labor, capital, and entrepreneurship) and has full control over the economy. While in the market economy, the decisions are based on the market forces. Under this economy, firms or businesses are controlled by private hands and decisions related to determining the
Economics Concept Introduction
Free Market Economy: It is a system of the market in which prices of commodities are determined by the open market. Basically, demand and supply forces of market play important role in the determination of prices. The free market economy is very competitive, and industries are
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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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