Economics,,,

12. Long answer (25 points). Suppose that we have a labor market in equilibrium. The labor demand curve is Ly = 1000 - 25w, and the labor supply curve is L, = 100 + 20w. Suppose the government decides that everyone who works ought to exercise. They are considering two ways to do this, either through a payroll tax on workers of $3 per hour per worker which would then be used to provide workers with free health club memberships or through mandating provision of access to health clubs at work (which would also cost $3 an hour per worker). (a) What is the equilibrium before the policies are implemented?24. Determine which of the following statements is NOT a typical reason for why derivative securities are used to manage financial risk. (A) Derivatives are used as a means of hedging. (B) Derivatives are used to reduce the likelihood of bankruptcy. (C) Derivatives are used to reduce transaction costs. (D) Derivatives are used to satisfy regulatory, tax, and accounting constraints. (E) Derivatives are used as a form of insurance.5) You are given the following set of diagrams for a two-stock portfolio, with expected return on the vertical axis and volatility on the horizontal axis. These diagrams are meant to help investors identify the set of efficient portfolios. Identify the diagram demonstrating the highest correlation between the two stocks. (A) (B) (C) (D) (E)8) You are given the following information about a two-asset portfolio: (i) The Sharpe ratio of the portfolio is 0.3667. (ii) The annual effective risk-free rate is 4%. (iii) If the portfolio were 50% invested in a risk-free asset and 50% invested in arisky asset X, its expected return would be 9.50%. Now, assume that the weights were revised so that the portfolio were 20% invested in a risk-free asset and 80% invested in risky asset X. Calculate the standard deviation of the portfolio return with the revised weights. (A) 6.0% (B) 6.2% (9) 12.8% (D) 15.0% (E) 24.0%12) Which of following statements represents the homogeneous expectations assumption that underlies the Capital Asset Pricing Model (CAPM)? (A) Investors can only buy and sell at competitive market prices. (B) Investors can borrow or lend at the risk-free interest rate. (C) There are no taxes or transaction costs. (D) All investors have identical estimates for the volatilities, correlations, and expected returns of securities. (E) Investors only hold portfolios that yield maximum expected return for a given level of volatility.49. The market price of Stock A is 50. A customer buys a 50-strike put contract on Stock A for 500. The put contract is for 100 shares of A. Calculate the customer's maximum possible loss. (A) 0 (B) 5 (C) 50 (D) 500 (E) 5000 50. An investor bought a 70-strike European put option on an index with six months to expiration. The premium for this option was 1. The investor also wrote an 80-strike European put option on the same index with six months to expiration. The premium for this option was 8. The six-month interest rate is 0%. Calculate the index price at expiration that will allow the investor to break even. (A) 63 (B) 73 77 (D) 80 (E) 8722) Determine which of following is an example of a behavioral bias that might cause the market portfolio not to be efficient. (A) Investors are attracted to large growth stocks that receive greater news coverage. (B) Investors are attracted to investments with skewed distributions that have a small probability of an extremely high payoff. (C) The true market portfolio may be efficient, but the proxy an investor uses to mimic the market portfolio may be inaccurate. (D) Investors are exposed to significant non-tradeable risks outside their portfolio. such as human capital. (E) Investors systematically ignore positive-NPV investment opportunities.6. Denote the agents net savings/borrowing position in the first period by s. Write the agents' two budget constraints, one for each time period. Then, combine these budget constraints into a single budget constraint over c, ca, and L. Show how this economy relates to the economy described in parts 1 and 2 by providing prices for p1, pa, and w for the general economy (parts 1 & 2) that make this economy mathematically equivalent (you should normalize p, = 1)