EBK MICROECONOMICS
4th Edition
ISBN: 9781319115890
Author: KRUGMAN
Publisher: MPS (CC)
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Question
Chapter 6, Problem 7P
To determine
To Calculate:
- The
elasticity of demand by using the midpoint method, when theprice rises from $5 to $6 with an average tourist income of $20,000. Carry out the same calculation for the average tourist income of $30,000. - The income elasticity of demand by using the midpoint method when price of T-shirts is $4 and the average tourist income rises from $20,000 to $30,000. Carry out the same calculation when the price is $7.
Concept Introduction:
The percentage change of quantity demanded in response to percentage change in price
Income Elasticity of Demand:
The percentage change of quantity demanded in response to percentage change in income
Mid-point Method:
If X is a variable, then percentage change of X using mid-point method is (New value of X − Old Value of X)/ Average value of X
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3. Consider a call on the same underlier (Cisco).
The strike is $50.85, which is the forward price.
The owner of the call has the choice or option to buy at the strike.
They get to see the market price S1 before they decide.
We assume they are rational.
What is the payoff from owning (also known as being long) the call?
What is the payoff from selling (also known as being short) the call?
Payoff from Call with
Strike of k=$50.85
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$100
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$50.85
$50
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4. Consider a put on the same underlier (Cisco).
The strike is $50.85, which is the forward price.
The owner of the call has the choice or option to buy at the strike.
They get to see the market price S1 before they decide.
We assume they are rational.
What is the payoff from owning (also known as being long) the put?
What is the payoff from selling (also known as being short) the put?
Payoff from Put with
Strike of k=$50.85
S1
Long
$100
$95
$90
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$75
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$45
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$35
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The following table provides information on two technology companies, IBM and Cisco. Use the
data to answer the following questions.
Company
IBM
Cisco Systems
Stock Price
Dividend
(trailing 12 months)
$150.00
$50.00
$7.00
Dividend
(next 12 months)
$7.35
Dividend
Growth
5.0%
$2.00
$2.15
7.5%
1. You buy a futures contract instead of purchasing Cisco stock at $50.
What is the one-year futures price, assuming the risk-free interest rate is 6%?
Remember to adjust the futures price for the dividend of $2.15.
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