All questions should be well explained

47. Several months ago, an investor sold 100 units of a one-year European call option on a nondividend-paying stock. She immediately delta-hedged the commitment with shares of the stock, but has not ever re-balanced her portfolio. She now decides to close out all positions. You are given the following information: (i) The risk-free interest rate is constant. (ii) Several months ago Now Stock price $40.00 $50.00 Call option price $ 8.88 $14.42 Put option price $ 1.63 $ 0.26 Call option delta 0.794 The put option in the table above is a European option on the same stock and with the same strike price and expiration date as the call option. IFM-01-18 Page 56 of 105 Calculate her profit. (A) $11 (B) $24 (C) $126 (D) $217 (E) $240 48. DELETED 49. You use the usual method in Mcdonald and the following information to construct a one-period binomial tree for modeling the price movements of a nondividend- paying stock. (The tree is sometimes called a forward tree). The period is 3 months. (ii) The initial stock price is $100. (iii) The stock's volatility is 30%. (iv) The continuously compounded risk-free interest rate is 4%. At the beginning of the period, an investor owns an American put option on the stock. The option expires at the end of the period. Determine the smallest integer-valued strike price for which an investor will exercise the put option at the beginning of the period. (A) 114 (B) 115 (C) 116 (D) 117 (E) 11850. Assume the Black-Scholes framework. You are given the following information for a stock that pays dividends continuously at a rate proportional to its price. i) The current stock price is 0.25. (ii) The stock's volatility is 0.35. (iii) The continuously compounded expected rate of stock-price appreciation is 15%. Calculate the upper limit of the 90% lognormal confidence interval for the price of the stock in 6 months. (A) 0.393 (B) 0.425 (C) 0.451 (D) 0.486 (E) 0.529 51-53. DELETED 54. Assume the Black-Scholes framework. Consider two nondividend-paying stocks whose time- prices are denoted by S,(t) and S2(t), respectively. You are given: (i) $1(0) = 10 and $2(0) = 20. (ii) Stock 1's volatility is 0.18. (iii) Stock 2's volatility is 0.25. (iv) The correlation between the continuously compounded returns of the two stocks is -0.40. (v) The continuously compounded risk-free interest rate is 5%. (vi) A one-year European option with payoff max { min[281(1), $2(1)] - 17, 0} has a current (time-0) price of 1.632. Consider a European option that gives its holder the right to sell either two shares of Stock 1 or one share of Stock 2 at a price of 17 one year from now. Calculate the current (time-0) price of this option. IFM-01-18 Page 58 of 105 (A) 0.67 (B) 1.12 (C) 1.49 (D) 5.18 (E) 7.86 55. Assume the Black-Scholes framework. Consider a 9-month at-the-money European put option on a futures contract. You are given: (i) The continuously compounded risk-free interest rate is 10%. (ii) The strike price of the option is 20. (iii) The price of the put option is 1.625. If three months later the futures price is 17.7, what is the price of the put option at that time?111) La Bella Pizza is the only pizza place on Pepper Island. The figure above shows La Bella Pizza's 111) demand curve, marginal revenue curve, and marginal cost curve. At La Bella Pizza's profit-maximizing output, its annual total revenue is A) $312,000. B) $624,000. C) $168,000. D) $336,000. 25 2 20 Price (dollars per surfboard) 15 10 MR: 5 10 15 20 25 30 Quantity (surfboards per hour) 112) The figure above shows the demand curve facing Sue's Surfboards, the sole renter of surfboards on 112) Big Wave Island. Sue's Surfboards currently rents 15 surfboards an hour. Sue's total revenue from the 15 surfboards is A) $10. B) $225. C) $300. D) $150. 17 113) Sue's Surfboards is the sole renter of surfboards on Big Wave Island. Sue's demand and marginal 113) revenue curves are illustrated in the figure above. The change in the total revenue from renting the 15th surfboard is A) $20. B) $0. C) $10. D) $15. 114) The figure above shows the demand and marginal revenue curves facing Sue's Surfboards, the sole 114) renter of surfboards on Big Wave Island. If Sue is renting 25 surfboards an hour so that the marginal revenue is negative, then Sue's Surfboards A) must face a unit elastic demand for surfboard rentals. B) can increase its profit by increasing the number of rentals. C) must face an elastic demand for surfboard rentals. D) must face an inelastic demand for surfboard rentals. 50 40 Price and costs (dollars per book) 30 MC 20 10 MR D 0 2 3 4 5 6 Quantity (thousands of books per year) 115) Bob's Books is the only bookstore in town. The figure above shows the demand curve for books 115) and Bob's Books' marginal revenue curve and marginal cost curve. Bob's Books maximizes its profit and sets the price of a book equal to _ and has total annual revenue of A) $20, $60,000 B) $30; $60,000 C) $10; $40,000 D) $40; $40,00088) In the figure above, the elasticity of demand facing the monopoly equals one when it produces 88) output. A) k B) h Ci D) none of the above 89) In the figure above, a single-price unregulated monopoly will set price 89) A) a. B) b. C) c. D) d. 13 90) In the figure above, a single-price unregulated monopoly will produce at output 90) A) k. B) j- C) h. D) none of the above 91) In the figure above, the transfer of consumer surplus from consumers to the producer caused by 91) production under a single-price monopoly instead of perfect competition is the area of A) trapezoid beic. B) rectangle begd. C) rectangle befc. D) triangle abe. 92) In the figure above, consumer surplus at the price that maximizes the profit for an unregulated, 92) single-price monopolist is the area of A) triangle eig B) triangle abe. C) rectangle Ohga. D) rectangle Ofeb. 93) In the figure above, the deadweight loss from production under a single-price monopoly instead 93) of perfect competition is the area of A) triangle aic. B) triangle acb. C) triangle eig D) triangle eif. 94) In the figure above, a perfectly price-discriminating monopoly will maximize profit by producing 94) at output A) h. B) k D) none of the above 95) In the figure above, the total revenue of a perfectly price-discriminating monopolist at the 95) profit-maximizing output is equal to the area of A) Odgh. B) Obeij. C) aci. D) Oaij. 96) When an increase in a firm's output of a good or service brings a decrease in the average total cost 96) of producing it, the firm is experiencing A) diseconomies of scale. B) economies of scale. C) economies of scope. D) diminishing returns. 97) Economies of scope arise when 97) A) an increase in output causes average total cost to fall. B) doubling inputs causes output to more than double. C) high profit allows a company to undertake research and development. D) an increase in the range of goods produced causes average total cost to fall. 98) When an increase in the range of goods produced brings a decrease in the average total cost of 98) production, the firm is experiencing A) diminishing returns. B) economies of scale. C) economies of scope. D) diseconomies of scale. 99) Which of the following is NOT a possible gain to society from a monopoly? 99) A) The monopoly may induce innovation. B) The monopoly may achieve economies of scope. C) The monopoly may create rent seeking. D) The monopoly may achieve economies of scale. 14 100) Which of the following statements regarding a marginal-cost pricing rule is incorrect? 100) A) It is efficient. B) It allows the firm to earn a normal profit. C) It maximizes total surplus in a regulated industry.80) Using the demand schedule in the above table, the marginal revenue for the perfectly price 80) discriminating monopolist from the sale of the third unit of output is A) $6. B) $5. C) $4. D) $3. 81) Using the demand schedule in the table above, the total revenue a perfectly price discriminating 81) monopolist receives from selling 5 units of output is A) $18. B) $5. C) $15. D) $25 5 Price and costs (dollars per ticket) 3 MC N MR 0 20 40 60 80 100 120 Quantity (tickets per hour) 82) If the monopoly illustrated in the figure above could engage in perfect price discrimination, then 82) each buyer would pay A) $2.00. B) $3.50. C) $3.00. D) a different price. 12 83) If the monopoly illustrated in the figure above could engage in perfect price discrimination, then 83) the lowest ticket price would be A) $3.50. B) $3.00. C) $1.00. D) $2.00. 84) If the monopoly illustrated in the figure above could engage in perfect price discrimination, then it 84) would sell A) 60 tickets. B) 50 tickets. C) 30 tickets. D) 100 tickets. 85) If the monopoly illustrated in the figure above could engage in perfect price discrimination, then 85) total revenue collected by the firm would be A) $110. B) $210. C) $120. D) $310. 86) In the figure above, what is the loss of consumer surplus if the firm is a perfectly 86) price-discriminating monopoly instead of a perfectly competitive industry? A) $22.50 B) $90.00 C) $0 D) $45.00 87) If the monopoly illustrated in the figure above could engage in perfect price discrimination, the 87) deadweight loss would be A) $22.50. B) $250.00. C) $0. D) $90.00. a Price (dollars) h Quantity (units per week) 88) In the figure above, the elasticity of demand facing the monopoly equals one when it produces 88)61) In the figure above, the efficient amount of output is 61) A) 40 units. B) 60 units. C) 20 units. D) 80 units. 62) The output produced by the single-price, unregulated monopoly in the above figure is 62) A) efficient because marginal costs equals marginal revenue. B) efficient because profit is maximized. C) inefficient because too little is produced. D) inefficient because too much is produced. 63) In the figure above, the single-price, unregulated monopoly sets a price of 63) A) $40 per unit. B) $60 per unit. C) $80 per unit. D) $0 per unit. 64) Consumer surplus is 64) A) equal to the price minus the marginal cost. B) less in the case of a single-price monopoly than in the case of a perfectly competitive industry. C) zero for a single-price monopolist. D) positive in the case of a monopolist practicing perfect price discrimination. 65) In comparison with a perfect competition, a single-price monopolist with the same costs 65) A) generates a larger consumer surplus and a larger economic profit. B) generates a smaller consumer surplus but a larger economic profit. () generates a larger consumer surplus and a smaller economic profit D) generates a smaller consumer surplus and a smaller economic profit. 66) Compared to a competitive industry, a monopoly transfers 66) A) consumer surplus to producers. B) producer surplus to consumers. C) deadweight loss away from producers to consumers. D) deadweight loss away from consumers to producers. 67) Any attempt to capture a consumer surplus, a producer surplus, or an economic profit is called 67) A) efficiency gain. B) profit-maximizing. C) rent-seeking. D) price discriminating. 68) Efforts by a firm to obtain a monopoly 68) A) are called price taking. B) are called price discrimination. C) raise consumer surplus. D) are called rent seeking. 69) Activity aimed at creating artificial barriers to entry to a particular market 69) A) improves competition. B) is rent seeking C) has no social cost. D) improves the economy's efficiency. 70) Rent seeking is devoted to the creation of 70) A) more elastic demand. B) monopolies. C) human capital. D) competitive industries. 10 71) Rent seeking through lobbying 71) A) results in perfectly competitive industries. B) uses up resources. C) results in perfect price discrimination. D) reduces deadweight loss. 72) The value of resources devoted to rent seeking will 72) A) reduce consumer surplus. B) equal the monopoly's economic profits. () raise output to an efficient level. D) reduce deadweight loss.un Price and costs (dollars per ticket) w MC N MR O 20 40 60 80 100 120 Quantity (tickets per hour) 42) The unregulated, single-price monopoly shown in the figure above will sell 42) A) 50 tickets. B) 30 tickets. C) less than 30 tickets. D) 100 tickets. 43) An unregulated, single-price monopoly is shown in the figure above. If fixed cost is $20, the 43) monopoly's total costs when it is maximizing its profit will be A) $30. B) $40. C) $140. D) $80 44) An unregulated, single-price monopoly is shown in the figure above. If fixed cost is $20, the 44) monopoly's total economic profit when it is maximizing its profit will be A) $0. B) $50. C) negative. D) $25. 45) The monopoly illustrated in the figure above is unregulated and charges a single price. The 45) deadweight loss created by the monopoly is A) $90.00. B) $0. C) $22.50. D) $45.00. 46) Unregulated monopolies can often earn an economic profit in the long run because 46) A) they have high costs. B) barriers to entry prevent competing firms from entering the market. C) they receive government subsidies. D) the risks of running a monopoly are high. 47) Compared to a single-price monopoly, a perfectly competitive industry produces 47) A) more output and has a higher price. B) more output and has a lower price. C) less output and has a higher price. D) less output and has a lower price. 7 48) Which of the following statements is true? 48) A) A perfectly competitive industry produces more output and charges the same price as a single-price monopoly. B) A perfectly competitive industry produces less output but charges a lower price than a single-price monopoly. C) A perfectly competitive industry produces less output and charges the same price as a single-price monopoly. D) A perfectly competitive industry produces more output and charges a lower price than a single-price monopoly. OD) continue to produce this level of output because any change will lower its profit. 50 TC TR 40 30 Total revenue and total cost (dollars per day) 20 10 0 5 10 15 20 25 30 Quantity (units per day) 34) The figure above shows a monopoly's total revenue and total cost curves. The monopoly's 34) economic profit is positive if it produces between A) 0 and 20 units. B) 5 and 20 units. C) 0 and 15 units. D) 0 and 5 units. 35) The figure above shows a monopoly's total revenue and total cost curves. The monopoly's 35) economic profit is zero if it produces A) 15 units of output. B) 5 or 20 units of output. C) 0 units of output. D) none of the above 36) The figure above shows a monopoly's total revenue and total cost curves. The monopoly's 36) economic profit is maximized when it produces A) 5 units of output. B) 20 units of output. C) 0 units of output. D) 15 units of output. 5 37) The figure above shows a monopoly's total revenue and total cost curves. The monopoly's marginal revenue equals its marginal cost when it produces A) 5 units of output. B) 15 units of output. C) 20 units of output. D) 0 units of output. 38) The monopoly with the TR and TC curves shown in the figure above will produce 38) A) 5 units of output. B) 20 units of output. C) 15 units of output. D) 0 units of output. 10 Price and costs (dollars per unit) X 2 12 Quantity (units per year) 39) For the unregulated, single-price monopoly shown in the figure above, when its profit is 39) maximized, output will be A) 4 units per year and the price will be $6. B) 6 units per year and the price will be $4. C) 4 units per year and the price will be $4. D) None of the above answers is correct. 40) The unregulated, single-price monopoly shown in the figure above will produce where its demand 40) A) equals its ATC curve. B) is inelastic.22) If the price elasticity of demand is less than 1, a monopoly's 22) A) marginal revenue is undefined. B) total revenue decreases when the firm lowers its price. C) total revenue increases when the firm lowers its price. D) marginal revenue is zero. 23) If the demand for its product is elastic, a monopoly's 23) A) total revenue is unchanged when the firm lowers its price. B) total revenue decreases when the firm lowers its price. C) marginal revenue is zero. D) marginal revenue is positive. 24) If the demand for its product is inelastic, a monopoly's 24) A) marginal revenue is negative. B) total revenue is unchanged when the firm lowers its price. C) total revenue increases when the firm lowers its price. D) marginal revenue is equal to zero. 25) A monopoly firm expands its output and lowers its price. The firm finds that its total revenue falls. 25) Hence, the firm is producing in the A) inelastic range of its supply curve. B) elastic range of its supply curve. C) elastic range of its demand curve. D) inelastic range of its demand curve. 3 100 80 Price and costs (dollars per unit) 60 MC 40 20 D MR 0 20 40 60 80 100 120 Quantity (units per day) 26) The figure above shows a monopoly firm's demand curve. If the price and quantity of haircuts 26) move from point : to point r, the monopoly's A) marginal revenue will decrease. B) total revenue will fall. C) total revenue will remain the same. D) total revenue will rise. 27) The figure above shows a monopoly firm's demand curve. If the price and quantity of haircuts 27) move from point : to point us, the monopoly's A) total revenue will remain the same. B) total revenue will fall. C) marginal revenue will increase. D) total revenue will rise. 28) The figure above shows a monopoly firm's demand curve. At point f 28) A) demand is inelastic. B) demand is elastic. C) demand is unit elastic. D) total revenue is at a minimum. 29) The figure above shows a monopoly firm's demand curve. The monopoly's total revenue is at its 29) maximum when the firm produces at point A) t. B) 1. C) x. D) r. 30) The figure above shows a monopoly firm's demand curve. The monopoly's total revenue is zero at 30) point A) x. B) f. C) it. D) r. 31) The figure above shows a monopoly firm's demand curve. At point u in the figure, the demand 31) facing the monopoly is12) Which of the following is true of a natural monopoly? 12) A) The firm can supply the entire market at a lower cost than could two or more firms. B) Its average total cost curve slopes upward as it intersects the demand curve. C) The firm is not protected by any barrier to entry. D) Economies of scale exist to only a very low level of output. 13) A market in which competition and entry are restricted by the granting of a public franchise, 13) government license, patent, or copyright is called a A) price-discriminating monopoly. B) single-price monopoly. C) natural monopoly. D) legal monopoly. 14) A single-price monopoly charges the same price 14) A) even if the demand curve shifts. B) to all customers. C) even if its cost curves shift. D) and the price equals the firm's marginal revenue. 15) All of the following are examples of price discrimination EXCEPT 15) A) lower ticket prices for matinee performances. B) buy-one-get-one-free offers. C) "early bird specials" at a restaurant. D) "buy now, pay later" payment options. 16) Total revenue equals 16) A) total cost minus profit. B) price times quantity sold. C) marginal revenue times quantity sold. D) the area between the demand curve and the marginal revenue curve. 17) For a monopoly, the industry demand curve is the firm's 17) A) profit function. B) marginal revenue curve. C) supply curve. D) demand curve. 2 18) Monopolists 18) A) face downward sloping demand curves. B) are price takers. C) have no short-run fixed costs. D) maximize revenue, not profits. 19) The marginal revenue curve for a single-price monopoly 19) A) lies below its demand curve. B) is horizontal. C) lies above its demand curve. D) coincides with its demand curve. 20) For a single-price monopoly, marginal revenue is when demand is elastic and is 20) when demand is inelastic. A) negative; positive B) positive; positive C) positive; negative D) negative; negative 21) If the price elasticity of demand is greater than 1, a monopoly's 21) A) marginal revenue is zero. B) total revenue decreases when the firm lowers its price. C) marginal revenue is negative. D) total revenue increases when the firm lowers its price. 22) If the price elasticity of demand is less than 1, a monopoly's 22) A) marginal revenue is undefined. B) total revenue decreases when the firm lowers its price. C) total revenue increases when the firm lowers its price