{a} Evaluate the operational utility of demand elasticity estimates, and outline any interpretations] difculties in the use of such estimates. {b} The annual demand function for a particular motor car is estimated as: -1o00010Pf3+l'2!1000 where Dnannual demand, P=price in 's and Y= average disposable income. (i) Given that the retail price cert year will be 12 000, whilst average disposable income is expected to be mill], esti- mate next year's annual demand. If the manufacturer receives 80% of the retail price for each car sold, estimate the manufacturer's revenue next year. (ii) Find the retail price to maximise manufacturer's revenue next year. (iii) If the marginal cost per car is estimated to be 6000, nd the price to maximise prot next year. {iv} In the subserluent year the retail price is expected to rise to 13111], whilst incomes should increase by 5%. Estimate demand and manufacturer's revenue for that year, and use this information to estimate the price and income demand elasticities. 'There is a simple relationship between advertising and protability: the most protable rms are the ones that advertise most. Therefore advertising must increase protability.' Discuss. Critically examine the proposition that as the contemplated future volume of output increases, the expected unit cost of output declines. Recommend a price and marketing strategy for the established automobile manufacturer seeking to enter the market for specialist competition motorcycles. Compare your recommendations to those for the automobile rm seeking to enter the volume small car market. An engineering rm about to undertake a production run of 2000 items must decide whether to overhaul the production machinery. Because the machinery is quite old, the cost of an overhaul is uncertain. However, after the overhaul the failure rate for the machinery is certain to be 0.01. Without the overhaul, the machinery has a failure rate with the probability distribution given below. Each defective item costs the rm 6 in hand nishing. E6. You bought an option that limits the interest rate on a future six-month loan to at most 10 percent p.a. (a) If, at the beginning of the six-month period, the interest rate is 11 percent, what is the expiration value of this option? (b) What is the option's expiration value if the interest rate turns out to be 8 percent?Question 3 (20 points) Several scholars have argued in favor of using procurement auctions (least cost bidders) to allocate management contracts for biodiversity. The two main auction approaches are discri- minatory price auctions and uniform price auctions. Both these auction formats have some advantages and disadvantages. (a) Explain why it is a weakly dominant strategy under uniform price auctions to truthfully reveal opportunity costs, while this is not the case for discriminatory price auctions. (10 points)QUESTIONS You will find the answers to the questions marked with 5. "Because corporations do not actually rise any an asterisk in the Textbook Resources section of your funds in secondary markets, these markets are less MyEconlab. important to the economy than primary markets." "1. Why is a share of Microsoft common stock an asset Comment. for its owner and a liability for Microsoft 6. If you suspect that a company will go bankrupt next 2. If I can buy a car today for $5000 and it is worth year, which would you rather hold, bonds issued by $10 000 in extra income next year to me because it the company or equities issued by the company? enables me to get a job as a travelling anvil seller, Why? should I take out a loan from Larry the Loan Shark $7. How can the adverse selection problem explain at a 90%% interest rate if no one else will give me a why you are more likely to make a loan to a family ban? Will I be better or worse off as a result of tak. member than to a stranger? ing out this loan? Can you make a case for legaliz- 8. Think of one example in which you have had to ing loan-sharking? deal with the adverse selection problem. *3. Some economists suspect that one of the reasons "9. Why do loan sharks worry less about moral hazard that economies in developing countries grow so in connection with their borrowers than some other slowly is that they do not have well-developed lenders do? financial markets Does this argument make sense? 10. If you are an employer, what kinds of moral hazard 4. Describe how authority over deposit-based financial problems might you worry about with your intermediaries is split among the Bank of Canada, employees? the OSFI, and the CDIC.Bid Offer USD / CHF 1.5025 1.5030 USD / JPY 125.18 125.20 USD / GBP 1.5475 1.5485 NZD / USD 0.4827 0,4837 1. Assuming the client had called Lehman for the above quotes, at what rate would you deal? a) You want to buy GBP b) You want to sell CHE c) You want to buy JPY d) You want to sell NZD 2. Using the same rates as above, determine the following bid/ offer cross rates. a) GBP/CHF b) NZD/JPY c) GBP/NZD 3. Today is Tuesday, October 22, 2002. a) You do a "Dollar-yen" trade. What date will it settle? b) You do a "Sterling-dollar" trade for cash. What date will it settle?_ c) You do a "Dollar-CAD" trade. What date will it settle?_ 4. You have just become the new Yen trader at Lehman Brothers. The old Yen trader left for Monaco with a square position. You do the following Citi calls for a JPY quote. You quote 123.97/124.00. Citi buys USD 5MM. 1. At what rate is the deal done? 2. What is your position in JPY?QUESTIONS You will find the answers to the questions marked with 8 Why are restrictive provisions a necessary part of an asterisk in the Textbook Resources section of your insurance policies MyEconlab. *9. If you needed to take out a loan, why might you 1. If death rates were to become less predictable than first go to your local bank rather than to a finance they are, how would life insurance companies company? change the types of assets they hold? 10. Explain why shares in closed-end mutual funds typ- 2. Why do property and casualty insurance companies ically sell for less than the market value of the stocks have large holdings of liquid assets but life insur- they hold. ance companies do not? '11. Why might you buy a no-load mutual fund instead 3. Why are all defined contribution pension plans fully of a load fund? funded? 12. Why can a money market mutual fund allow its 4. How can favourable tax treatment of pension plans shareholders to redeem shares at a fixed price but encourage saving? other mutual funds cannot 5. "In contrast to private pension plans, government *13. Why might government loan guarantees be a high- pension plans are rarely underfunded." Is this state- cost way for the government to subsidize certain ment true, false, or uncertain? Explain your answer. activities 6. What explains the widespread use of deductibles in 14. If you like to take risks, would you rather be a insurance policies? dealer, a broker, or a specialist? Why? 7. Why might insurance companies restrict the amount *15. Is investment banking a good career for someone of insurance a policyholder can buy? who is afraid of taking risk: Why or why not