3. An informed trader has private information that the value of a stock is $100 per share.

Without this information, the variance of payoffs on the stock would be $60; this is the level of payoff uncertainty faced by uninformed investors. The variance associated with uninformed investor trades is 10,000 shares.

a. If the value of the stock were to be $100 without the private information, what would be the level of informed trader demand for the stock?

b. If the value of the stock were to be $90 without the private information, what would be the level of informed trader demand for the stock?

c. What will be the informed trader’s expected profits from purchasing the number of shares computed in part b?

d. Suppose that actual uninformed demand for the stock were zero. Based on your computations from part

b, at what level would the dealer set the stock price?