Economics: Private and Public Choice
16th Edition
ISBN: 9781337642224
Author: James D. Gwartney; Richard L. Stroup; Russell S. Sobel
Publisher: Cengage Learning US
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Question
Chapter 7, Problem 3CQ
To determine
Explain the components of
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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.
5. Consider a one-year European-style call option on Cisco stock.
The strike is $50.85, which is the forward price.
The risk-free interest rate is 6%.
Assume the stock price either doubles or halves each period.
The price movement corresponds to u = 2 and d = ½ = 1/u.
S1 = $100
Call payoff=
SO = $50
S1 = $25
Call payoff=
What is the call payoff for $1 = $100?
What is the call payoff for S1 = $25?
MC
The diagram shows a pharmaceutical firm's demand
curve and marginal cost curve for a new heart medication
for which the firm holds a 20-year patent on its
production.
Assume this pharmaceutical firm charges a single price
for its drug. At its profit-maximizing level of output, it will
generate a total profit represented by
OA. areas J+K.
B. areas F+I+H+G+J+K
OC. areas E+F+I+H+G.
D. - it is not possible to determine with the informatio
OE. the sum of areas A through K.
(...)
Po
P1
Price
F
P2
E
H
0
G B
Q
MR
D
ō
Chapter 7 Solutions
Economics: Private and Public Choice
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Similar questions
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- Consider the figure on the right. A single-price monopolist will produce ○ A. 135 units and charge a price equal to $32. B. 135 units and generate a deadweight loss. OC. 189 units and charge a price equal to the perfectly competitive price. ○ D. 189 units and charge a price equal to $45. () Dollars per Unit $45 $32 MR D 135 189 Output MC NGarrow_forwardSuppose a drug company cannot prevent resale between rich and poor countries and increases output from 3 million (serving only the rich country with a price of $80 per treatment) to 9 million (serving both the rich and the poor countries with a price of $30 per treatment). Marginal cost is constant and equal to $10 per treatment in both countries. The marginal revenue per treatment of increasing output from 3 million to 9 million is equal to ○ A. $20 per treatment, which is greater than the marginal cost of $10 per treatment and thus implies that profits will rise. ○ B. $20 per treatment, which is greater than zero and thus implies that profits will rise. ○ C. $30 per treatment, which is greater than the marginal cost of $10 per treatment and thus implies that profits will rise. ○ D. $5 per treatment, which is less than the marginal cost of $10 per treatment and thus implies that profits will fall. ○ E. $30 per treatment, which is less than the marginal revenue of $80 per treatment…arrow_forwardConsider the figure. A single-price monopolist will have a total revenue of Single-Price Monopolist OA. 84×$13. O B. 92x $13. OC. 84×$33. OD. 92 x $33. C Price ($) $33 $13 MC MR D 84 92 Output The figure is not drawn to scale.arrow_forward
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