Answer all questions correctly.

why organic food sells at higher prices than conventional food. Why? include a graph to support your answer. Answer this question according to the given pages.

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13 An unquoted company wishes to raise a large loan in order to invest in a major new project. The finance director has proposed issuing bonds that have a significant number of warrants attached. Describe the advantages and disadvantages to the company's existing shareholders of attaching warrants to the bond issue. [5] 14 Describe the advantages of raising additional equity finance by means of a rights issue. [5] 15 A small company engaged a firm of consultants to evaluate a very complicated investment opportunity. The consultancy devised a Monte Carlo simulation and ran a very large number of iterations. They discovered that the project generated a positive net present value for 85% of the simulations. The directors of the company believe that this result is sufficient for them to justify investing in the project. Explain how the directors should go about interpreting the results of this simulation before making a final decision on the project. [5] 16 Describe the purpose of a cash flow statement. [5]17 Much of the recent discussion of the role of the firm deals with a range of stakeholder interests, rather than the previous emphasis on the shareholder only. Identify two stakeholders other than the shareholders and briefly explain why their interests might conflict with those of the shareholders. [5] 18 Many large companies issue debentures as a means of raising long term finance. These are often quoted on the stock exchange. Describe the risks associated with investing in such debentures. [5] A major quoted company has announced that it has amassed a cash "mountain". It proposes to return this cash to the shareholders 18 months after the date of the announcement. Rather than do so by means of a dividend, the company will buy a proportion of each shareholders' shares back at a small premium to the prevailing market price. (i) Explain why management might want to return cash to the shareholders instead of retaining it in the company. [4] (ii) Explain how the company's share price might react to this purchase: (a) on the announcement of the buy-back (b) at the time of the buy-back [8] (iii) Explain why the company might have chosen to purchase shares rather than make a dividend payment of the same amount. [4] (iv) Explain why the company has announced this transaction 18 months in advance. [4] [Total 20]amples When economists talk about prices, they are less interested in making judgments than in gaining a practical understanding of what determines prices and why prices change. Consider a price most of us contend with weekly: that of a gallon of gas. Why was the average price of gasoline in the United States $3.71 per gallon in June 2014? Why did the price for gasoline fall sharply to $1.06 per gallon by January 2016? To explain these price movements, economists focus on the determinants of what gasoline buyers are willing to pay and what gasoline sellers are willing to accept. As it turns out, the price of gasoline in June of any given year is nearly always higher than the price in January of that same year. Over recent decades, gasoline prices in midsummer have averaged about 10 cents per gallon more than their midwinter low. The likely reason is that people drive more in the summer, and are also willing to pay more for gas, but that does not explain how steeply gas prices fell. Other factors were at work during those 18 months, such as increases in supply and decreases in the demand for crude oil. This chapter introduces the economic model of demand and supply- one of the most powerful models in all of economics. The discussion here begins by examining how demand and supply determine the price and the quantity sold in markets for goods and services, and how changes in demand and supply lead to changes in prices and quantities.Search this book Q My highlights 9 Print a market. First let's first focus on what economists mean by demand, what they mean by supply, and then how demand and supply Interact in Demand for Goods and Services Economists use the term demand to refer to the amount of some good or service consumers are willing and able to purchase at each price. Demand is fundamentally based on needs and wants-if you have no need or want for something, you won't buy it. ly While a consumer may be able to differentiate between a need and a want, but from an economist's perspective they are the same thing. Demand is also based on ability to pay. If you cannot pay for it, you have no effective demand. By this definition, a homeless brium person probably has no effective demand for shelter. What a buyer pays for a unit of the specific good or service is called price. The total number of units that consumers would purchase at that price is called the quantity demanded. A rise in price of a good or service almost always decreases the quantity demanded of that good or service. Conversely, a fall in price will increase the quantity demanded. When the price of a gallon of gasoline increases, for example, people look for ways to reduce their consumption by combining several errands, commuting by carpool or mass transit, or taking weekend or vacation trips closer to home. Economists call this inverse relationship between price and quantity demanded the law of demand. The law of demand assumes that all other variables that affect demand (which we explain in the next module) are held constant. We can show an example from the market for gasoline in a table or a graph, Economist call a table that shows the quantity demanded at each price, such as Table 3. 1, a demand schedule. In this case we measure price in dollars per gallon of gasoline. We measure the quantity demanded in millions of gallons over some time period (for example, per day or per year) and over some geographic area (like a state or a country). A demand curve shows the relationship between price and quantity demanded on a graph like Figure 3.2, with quantity on the horizontal axis and the price per gallon on the vertical axis. (Note that this is an exception to the normal rule in mathematics that the independent variable (x) goes on the horizontal axis and the dependent variable (y) goes on the vertical. Economics is not math.)My highlights 9 Print Table 3. 1 shows the demand schedule and the gnigh in Elrite .2 shows the darnand curve. Ifirst are two ways to describe the Game relationship between price and quilty demanded. Price (per gallon) Quantity Demanded (millions of gallons) $1 20 $1.40 51.60 550 $1.80 500 $2.00 460 $2.20 420 Table J.1 Prog and Quantity Demanded of Gasoline D 52 20 (52 20 per gallon, 420 million gallons) 52.00 ($2.00 per gallon, 460 million gallons) (51.80 per gallon, 500 million gallons) ($1 60 per gallon, 550 million gallons) Price ($ per gallon ($1 40 per gallon, 600 million gallons), $1 40 (51 20 par gallon, 700 million gallons) 51 20 (51 00 per gallon, 800 million gallons) $1.00 300 400 500 600 700 800 900 Quantity of Gasoline (millions of gallons) 4:45 PM.My highlights & Print Demand curves will appear somewhat different for each product. They may appear relatively steep or flat, or they may be straight or curved. Nearly all demand curves share the fundamental similarity that they slope down from left to right. Demand curves embody demanded increases. the law of demand: As the price Increases, the quantity demanded decreases, and conversely, as the price decreases, the quantity Confused about these different types of demand? Read the next Clear It Up feature. CLEAR IT UP Is demand the same as quantity demanded? In economic terminology, demand is not the same as quantity demanded. When economists talk about demand, they mean the relationship between a range of prices and the quantities demanded at those prices, as illustrated by a demand curve or a demand schedule, When economists talk about quantity demanded, they mean only a certain point on the demand curve, or one quantity on the demand schedule, In short, demand refers to the curve and quantity demanded refers to the (specific) point on the curve. Supply of Goods and Services When economists talk about supply, they mean the amount of some good or service a producer is willing to supply at each price. Price is what the producer receives for selling one unit of a good or service. A rise in price almost always leads to an increase in the quantity supplied of that good or service, while a fall in price will decrease the quantity supplied. When the price of gasoline rises, for example, It encourages profit-seeking firms to take several actions: expand exploration for oil reserves; drill for more oil; invest in more pipelines and oil tankers to bring the oil to plants for refining into gasoline; build new oil refineries; purchase additional pipelines and trucks to ship the gasoline to gas stations; and open more gas stations or keep existing gas stations open longer hours. Economists call this positive relationship between price and quantity supplied-that a higher price leads to a higher quantity Supplied and a lower price leads to a lower quantity supplied-the law of supply. The law of supply assumes that all other variables that affect supply (to be explained in the next module) are held constant. Still unsure about the different types of supply? See the following Clear It Up feature.Search this book Q My highlights 8 Print Is supply the same as quantity supplied? In economic forminology, supply is not the same as quantity supplied. When economists rofor to supply, they moan the relationship between a range of prices and the quantities supplied at those prices, a tolationship that we can illustrate with a supply curve or a supply schedule. When economists refer to quantity supplied, they mean only a certain point on the supply curve, or one quantity on the supply schedule, In short. supply refers to the curve and quantity supplied rotors to the (specific) point on the curve, Elgute.3.3 illustrates the law of supply, again using the market for gasoline as an example. Like demand, wo can illustrate supply using a table or a graph. A supply schedule is a table, like Table 3.2, that shows the quantity supplied at a range of different priors, Again, we measure price in dollars per gallon of gasoline and we measure quantity supplied in millions of gallons. A supply curve is a graphic illustration of the relationship between price, shown on the vertical axis, and quantity, shown on the horizontal axis. The supply schedule and the supply curve are just two different ways of showing the same Information. Notice that the horizontal and vertical axes on the graph for the supply curve are the same as for the demand curve. 52.20 (52 20 per gallon, 720 million gallons) 52 00 . (52 00 per gallon, 700 million gallons) 51 80 # (51,80 per gallon, 680 million gallons) $1.60 (51.60 per gallon, 640 million gallons) Price ($ per gallon) $140 (51.40 per gallon, 600 million gallons) 51 20 (51 20 per gallon, 550 million gallons) 51:00 . (51 00 per gallon, 500 million gallons) 300 400 500 600 700 800 900 Quantity of Gasoline (millions of gallons) Figure 3.3 A Supply Curve for Gasoline The supply schedule is the table that shows quantity supplied of gasoline and each price. As price nses, quantity supplied also increases, and vice versa, The supply curve (5) is created by graphing the points from the supply schedule and then connecting them. The upward slope of the supply curve illustrates the law of supply that a higher price loads to a higher quantity supplied, and 4:47 PM ENGMy highlights _ Print Price (per gallon) Quantity Supplied (millions of gallons) $1.00 500 $1.20 550 $1.40 600 $1.60 640 $1.80 680 $2.00 700 $2.20 720 Table 3.2 Price and Supply of Gasoline The shape of supply curves will vary somewhat according to the product: steeper, flatter, straighter, or curved. Nearly all supply curves, however, share a basic similarity: they slope up from left to right and ilustrate the law of supply: as the price rises, say, from $1.00 per gallon to $2.20 per gallon, the quantity supplied increases from 500 gallons to 720 gallons. Conversely, as the price falls, the quantity supplied decreases.X Search this book Q My highlights & Print Equilibrium-Where Demand and Supply Intersect city Because the graphs for demand and supply curves both have price on the vertical axis and quantity on the horizontal cals, the demand curve and supply curve for a particular good or service can appear on the same graph. Together, demand and supply determine the price and the quantity that will be bought and sold in a market. d Supply Figure 3.4 illustrates the interaction of demand and supply in the market for gasoline. The demand curve (D) is identical to Figure 3.2. The supply curve (S) is identical to Figure 3.3. Table 3.3 contains the same information in tabular form. Equilibrium and S upply for $2.20 Excess supply or surplus Price and $1.80 An above-equilibrium price Process P (5 per gallon) E Floors 5140 Equilibrium price $1.20 A below-equilibrium price iciency $1.00 Excess demand D or shortage $0.60 300 400 500 600 700 800 900 Quantity of Gasoline (millions of gallons) Figure 3.4 Demand and Supply for Gasoline The demand curve (D) and the supply curve (S) intersect at the equilibrium point E. with a price of $1.40 and a quantity of 600. The equilibrium is the only price where quantity demanded is equal to quantity supplied. At a price above equilibrium like $1.80, quantity supplied exceeds the quantity demanded, so there is excess supply, At a price below equilibrium such as $1.20, quantity demanded exceeds quantity supplied, so there is excess demand. Quantity supplied (millions of gallons) gallons)My highlights 8 Print Price (per gallon) Quantity demanded (millions of gallons) Quantity supplied (millions of gallons) $1.00 800 $1.20 700 650 $1.40 600 $1.60 650 B40 $1.BD 500 $2.00 460 700 $2.20 420 720 Table 3.3 Price, Quantity Demanded, and Quantity Supplied Remember this: When two lines on a diagram cross, this intersection usually means something. The point where the supply curve (S) and the demand curve (D) cross, designated by point E in Figure 3 4, is called the equilibrium. The equilibrium price is the only price where the plans of consumers and the plans of producers agree-that is, where the amount of the product consumers want to buy (quantity demanded) is equal to the amount producers want to sell [quantity supplied). Economists cal this common quantity the equilibrium quantity. At any other price, the quantity demanded does not equal the quantity supplied, so the market Is not In equilibrium at that price. In Figure134, the equilibrium price is $1.40 per gallon of gasoline and the equilibrium quantity is 600 million gallons. If you had only the demand and supply schedules, and not the graph, you could find the equilibrium by looking for the price level on the tables where the quantity demanded and the quantity supplied are equal. The word "equilibrium" means "balance." If a market is at its equilibrium price and quantity, then it has no reason to move away from that point. However, if a market is not at equilibrium, then economic pressures arise to move the market toward the equilibrium price and the equilibrium quantity. Imagine, for example, that the price of a gallon of gasoline was above the equilibrium price-that is, Instead of $1.40 per gallon, the price is $1:80 per gallon. The dashed horizontal line at the price of $1.80 in Filmjune 3,4 Illustrates this above equilibrium price. At this higher price, the quantity demanded drops from 600 to 500, This decline in quantity reflects how consumers react to the higher price by finding ways to use less gasoline. 4:49Moreover, at this higher price of $1.80, the quantity of gasoline supplied rises from the 600 to 680, as the higher price makes it more profitable for gasoline producers to expand their output. Now, consider how quantity demanded and quantity supplied are related at this above-equilibrium price. Quantity demanded has fallen to 500 gallons, while quantity supplied has risen to 680 gallons. In fact. at any above-equilibrium price, the quantity supplied exceeds the quantity demanded. We call this an excess supply or a surplus. With a surplus, gasoline accumulates at gas stations, In tanker trucks, in pipelines, and at oil refineries, This accumulation puts pressure on gasoline sellers. If a surplus remains unsold, those firms involved in making and selling gasoline are not receiving enough cash to pay their workers and to cover their expenses. In this situation, some producers and sellers will want to cut prices, because it is better to sell at a lower price than not to sell at all. Once some sellers start cutting prices, others will follow to avoid losing sales. These price reductions in turn will stimulate a higher quantity demanded. Therefore, if the price is above the equilibrium level, incentives built Into the structure of demand and supply will create pressures for the price to fall toward the equilibrium. Now suppose that the price is below its equilibrium level at $1.20 per gallon, as the dashed horizontal line at this price in Figure 24 shows. At this lower price, the quantity demanded increases from 600 to 700 as drivers take longer trips, spend more minutes warming up the car in the driveway in wintertime, stop sharing rides to work, and buy larger cars that get fewer miles to the gallon. However, the below-equilibrium price reduces gasoline producers' incentives to produce and sell gasoline, and the quantity supplied falls from 600 to 550. When the price is below equilibrium, there is excess demand, or a shortage-that is, at the given price the quantity demanded, which has been stimulated by the lower price, now exceeds the quantity supplied, which had been depressed by the lower price, In this situation, eager gasoline buyers mob the gas stations, only to find many stations running short of fuel. Oil companies and gas stations recognize that they have an opportunity to make higher profits by selling what gasoline they have at a higher price, As a result, the price rises toward the equilibrium level. Read Demand. Supply, and Efficiency for more discussion on the Importance of the demand and supply model.My highlights 8 Print How Does Income Affect Demand? Let's use Income as an example of how factors other than price affect demand, Elguro $3.5 shows the initial demand for automobiles as Do- At point O, for example, If the price is $20,000 per car the quantity of cars demanded Is 18 million, Do also shows how the quantity of cars demanded would change as a result of a higher or lower price. For example, If the price of a car rose to $22,0100, the quantity demanded would decrease to 17 million, at point R. The original demand curve Do, like every demand curve, is based on the celeris parlbus assumption that no other economically relevant factors change. Now imagine that the economy expands in a way that raises the incomes of many people, making cars more affordable. How will this affect demand? How can we show this graphically? Return to Figure 3.5. The price of cars is still $20,000, but with higher incomes, the quantity demanded has now increased to 20 million cars, shown at point S. As a result of the higher income levels, the demand curve shills to the right to the now demand curve Dy, indicating an increase in demand. Table 3.4 shows clearly that this increased demand would occur at every price, not just the original one. $28,000 526,000 524,000 R $22.000 P# 30.100 P #20 000 12. 20 000 $20,000 Price 518,000 $16.000 D. D. $14.000 $12,000 $10,000 28 13 14.4 17 18 20 23 BSearch this book My highlights ) Print Price Decrease to Dy Original Quantity Demanded Dy Increase to Di $16,000 17.6 million 230 miron 24.0 million $18,000 18.0 muon 20 0 mison 27.0 million oply $20,000 14.4 million 18 0 million 20.0 million brium in Foes $22,000 13.0 million 17.0 million 19.0 million ly for $24.000 13 2 million 105 million 10.5 million and $26,000 12.8 million 16.0 million 10.0 million Table 3.4 Price and Demand Shifts! A Car Example Now, Imagine that the economy slows down so that many people lose their jobs or work lower hours, reducing their incomes in them case, the decrease in income would lead to a lower quantity of cars demanded at every given price, and the original demand curve Do would shift left to Da. The shift from Do to Do represents such a decrease in demand: At any given price wivel, the quantity demanded is now lower, In this example, a price of $20,000 means 18 million cars sold along the original demand curve, but only 14.4 million sold after demand fell. When a demand curve shifts, it does not mean that the quantity demanded by every individual buyer changes by the same amount, In this example, not everyone would have higher or lower income and not everyone would buy or not buy an additional car, Instead, a shift in a demand curve captures a pattern for the market as a whole, In the previous section, we argued that higher income causes greater demand at every price. This is the for most goods and services. For some-luxury cars, vacations in Europe, and fine jewelry the effect of a rise in income can be especially pronounced. A product whose demand rises when income rises, and vice versa, is called a normal good. A few exceptions to this pattern do exist As incomes rise, many people will buy fewer generic brand groceries and more name brand groceries. They are less likely to buy used cars and more likely to buy now cars. They will be less likely to rent an apartment and more likely to own a home. A product whose demand falls when income rises, and vice versa, is called an inferior good. In other words, when income Increases. the demand curve shifts to the left.Q My highlights 8 Print Other Factors That Shift Demand Curves Income is not the only factor that causes a shift in demand Other factors that challgo demand Include thetes and prefereros, the composition or size of the population, the prices of related goods, and even expectations. A charge in any one of the underlying factors that determine what quantity people are wiling to buy at a given price will cause a shut in derand. c'ethically, the new, demand curve fies either to the right (an increase) or to the left (a decrease) of the original demand curve, Let's look at these lactors. Changing Tastes or Preferences From 1980 to 2014, the per-person consumption of chicken by Americans rose from 18 pounds per year to 85 pounds per year, and consumption of beef fell from 77 pounds per year to 54 pounds per year, according to the U.S. Department of Agriculture (USQA) Changes like these are largely due to movements in taste. which change the quantity of a good demanded at every pilce; that Is, they shift the demand curve for that good, rightward for chicken and leftward for beat. Changes in the Composition of the Population The proportion of elderly citizens in the United States population is rising. It rose from 9.8%% in 1970 to 12.6%% in 2000, and wit be a projected (by the U.S. Census Bureau) 20% of the population by 2030, A society with relatively more children, The the United States In the 1960s, will have greater demand for goods and services like tricycles and day care faccities. A society with relatively more elderly persons, as the United States is projected to have by 2030, has a higher demand for nursing homes and hearing aids! Similarly, changes in the size of the population can affect the demand for housing and miany other goods. Each of these changes In demand will be shown as a shift in the demand curve. Changes in the prices of related goods such as substitutes or complements also can affect the demand for a product A substitute is a good or service that we can use in place of another good or service. As electronic books, like this one, become more available, you would expect to see a decrease in demand for traditional printed books. A lower price for a substitute decreases demand formy the other product. For example, In recent years as the price of tablet computers has fallen, the quantity demanded has Increased (because of the law of demand). Since people are purchasing tablets, there has been a decrease in demand for laptops, which we can show graphically as a leftward shift in the demand curve for laptops. A higher price for a substitute good has the reverse effect! Other goods are complements for each other, meaning we often use the goods together, because consumption of one good tends to enhance consumption of the other. Examples include breakfast cereal and milk notebooks and pens or pencils, golf balls and golf clubs; gasoline and sport utility vehicles; and the five way combination of bacon, lettuce, tomato, mayonnaise, and bread. If the price of golf clubs rises, since the quantity demanded of golf clubs falls (because of the law of demand), demand for a complement good like golf balls decreases, too. Similarly a higher price for skis would shift the demand curve for a complement good like skal resort trips to the left, while a lower price for a complement has the reverse effect. Changes in Expectations about Future Prices or Other Factors that Affect Demand