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> Consider the following portfolio. You write a put option with exercise price $90 and buy a put with the same expiration date with exercise price $95. a. Plot the value of the portfolio at the expiration date of the options. b. Now, plot the profit of t

> The following bond swaps could have been made in recent years as investors attempted to increase the total return on their portfolio. From the information presented below, identify possible reason(s) that investors may have made each swap.

> Consider the following options portfolio: You write a November 2019 expiration call option on Microsoft with exercise price $140. You also write a November expiration Microsoft put option with exercise price $145. a. Graph the payoff of this portfolio a

> An executive compensation scheme might provide a manager a bonus of $1,000 for every dollar by which the company’s stock price exceeds some cutoff level. In what way is this arrangement equivalent to issuing the manager calls options on the firm’s stock?

> what ways is owning a corporate bond similar to writing a put option? A call option?

> Why do you think the most actively traded options tend to be the ones that are near the money?

> Use the spreadsheet from the Excel Application boxes on spreads and straddles (page 492, also available in Connect; link to Chapter 15 material) to answer these questions. a. Plot the payoff and profit diagrams to a straddle position with an exercise (

> You think there is great upward potential in the stock market and would like to participate in the upward move if it materializes. However, you cannot afford substantial stock market losses and so cannot run the risk of a stock market collapse, which you

> A bearish spread is the purchase of a call with exercise price X2 and the sale of a call with exercise price X1, with X2 greater than X1. Graph the payoff to this strategy and compare it to Figure 15.10.

> a. A butterfly spread is the purchase of one call at exercise price X1, the sale of two calls at exercise price X2, and the purchase of one call at exercise price X3. X1 is less than X2, and X2 is less than X3 by equal amounts, and all calls have the sam

> Jane Joseph, a manager at Computer Science, Inc. (CSI), received 1,000 shares of company stock as part of her compensation package. The stock currently sells at $40 a share. Joseph would like to defer selling the stock until the next tax year. In January

> The common stock of the C.A.L.L. Corporation has been trading in a narrow range around $50 per share for months, and you believe it is going to stay in that range for the next three months. The price of a three-month put option with an exercise price of

> A member of a firm’s investment committee is very interested in learning about the management of fixed-income portfolios. He would like to know how fixed-income managers position portfolios to capitalize on their expectations concerning three factors tha

> The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, and you are convinced it is going to break far out of that range in the next three months. You do not know whether it will go up or down, however. T

> Suppose you think AppX stock is going to appreciate substantially in value in the next year. Say the stock’s current price, S0, is $100, and the call option expiring in one year has an exercise price, X, of $100 and is selling at a pric

> Imagine that you are holding 5,000 shares of stock, currently selling at $40 per share. You are ready to sell the shares but would prefer to put off the sale until next year due to tax reasons. If you continue to hold the shares until January, however, y

> An investor purchases a stock for $38 and a put for $0.50 with a strike price of $35. The investor also sells a call for $0.50 with a strike price of $40. a. What are the maximum profit and loss for this position? b. Draw the profit and loss diagram f

> We said that options can be used to either scale up or reduce overall portfolio risk. What are some examples of risk-increasing and risk-reducing options strategies? Explain each.

> Hatfield Industries is a large manufacturing conglomerate based in the United States with annual sales in excess of $300 million. Hatfield is currently under investigation by the Securities and Exchange Commission (SEC) for accounting irregularities and

> Recently, Galaxy Corporation lowered its allowance for doubtful accounts by reducing bad debt expense from 2% of sales to 1% of sales. Ignoring taxes, what are the immediate effects on (a) operating income and (b) operating cash flow?

> Cash flow from operating activities includes: a. Inventory increases resulting from acquisitions. b. Inventory changes due to changing exchange rates. c. Interest paid to bondholders. d. Dividends paid to stockholders.

> Cash flow from investing activities excludes: a. Cash paid for acquisitions. b. Cash received from the sale of fixed assets. c. Inventory increases due to a new (internally developed) product line. d. All of the above.

> A company’s current ratio is 2. If the company uses cash to retire notes payable due within one year, would this transaction increase or decrease the current ratio? What about the asset turnover ratio?

> a. Which set of conditions will result in a bond with the greatest price volatility? high coupon and a short maturity. A high coupon and a long maturity. A low coupon and a short maturity. A low coupon and a long maturity. b. An investor who expects de

> Rank the following bonds in order of descending duration.

> Suppose that the president proposes a new law aimed at reducing healthcare costs: All Americans are required to eat one apple daily. a. How would this apple-a-day law affect the demand and equilibrium price of apples? b. How would the law affect the marg

> Two towns, each with three residents, are deciding whether to put on a fireworks display to celebrate the New Year. Fireworks cost $360. In each town, some people enjoy fireworks more than others. a. In the town of Bayport, each of the residents values t

> Some years ago, the New York Times reported that “the inability of OPEC to agree last week to cut production has sent the oil market into turmoil . . . [leading to] the lowest price for domestic crude oil since June 1990.” a. Why were the members of OPEC

> Using supply-and-demand diagrams, show the effects of the following events on the market for sweatshirts. a. A hurricane in South Carolina damages the cotton crop. b. The price of leather jackets falls. c. All colleges require morning exercise in appropr

> You are the chief financial officer for a firm that sells gaming consoles. Your firm has the following average-total-cost schedule: Your current level of production is 600 consoles, all of which have been sold. Someone calls, desperate to buy one of your

> Buffy is thinking about opening an amulet store. She estimates that it would cost $350,000 per year to rent the location and buy the merchandise. In addition, she would have to quit her $80,000 per year job as a vampire hunter. a. Define opportunity cost

> Fredo loves watching Downton Abbey on his local public TV station, but he never sends any money to support the station during its fund-raising drives. a. What name do economists have for people like Fredo? b. How can the government solve the problem caus

> Suppose you are a typical person in the U.S. economy. You pay 4 percent of your income in a state income tax and 15.3 percent of your labor earnings in federal payroll taxes (employer and employee shares combined). You also pay federal income taxes. How

> This chapter discusses many types of costs: opportunity cost, total cost, fixed cost, variable cost, average total cost, and marginal cost. Fill in the type of cost that best completes each sentence: a. What you give up in taking some action is called th

> List some of the ways that the problems caused by externalities can be solved without government intervention.

> Why do some economists advocate taxing consumption rather than income?

> Why is the burden of a tax to taxpayers greater than the revenue received by the government?

> Explain how corporate profits are taxed twice.

> Henry Potter owns the only well in town that produces clean drinking water. He faces the following demand, marginal-revenue, and marginal-cost curves: Demand: P = 70 - Q Marginal Revenue: MR = 70 – 2Q Marginal Cost: MC = 10 + Q a. Graph these three cur

> Over the past century, has the government’s tax revenue grown more or less slowly than the rest of the economy?

> Suppose that survey measures of consumer confidence indicate a wave of pessimism is sweeping the country. If policymakers do nothing, what will happen to aggregate demand? What should the Fed do if it wants to stabilize aggregate demand? If the Fed does

> Between stocks and government bonds, which type of asset has more risk? Which pays a higher average return?

> Does an increase in the price of imported French wine affect the CPI or the GDP deflator more? Why?

> In the year 2020, the economy produces 100 loaves of bread that sell for $2 each. In the year 2021, the economy produces 200 loaves of bread that sell for $3 each. Calculate nominal GDP, real GDP, and the GDP deflator for each year. (Use 2020 as the base

> Describe how antipoverty programs can discourage the poor from working. How might you reduce this disincentive? What are the disadvantages of your proposed policy?

> When gauging the amount of inequality, why do transitory and life cycle variations in income cause difficulties?

> What groups in the U.S. population are most likely to live in poverty?

> What has happened to the income share of the richest fifth of the U.S. population over the past 40 years?

> Does the richest fifth of the U.S. population earn closer to three, six, or twelve times the income of the poorest fifth?

> Give an example of how discrimination might persist in a competitive market.

> Do the forces of economic competition tend to exacerbate or ameliorate racial discrimination?

> What difficulties arise in deciding whether a group of workers has a lower wage because of discrimination?

> How might education raise a worker’s wage without raising the worker’s productivity?

> In what sense is education a type of capital?

> Why are coal miners paid more than other workers with similar amounts of education?

> If the population of the United States suddenly grew because of a large wave of immigration, what would happen to wages? What would happen to the rents earned by the owners of land and capital?

> What kinds of behavior do the antitrust laws prohibit?

> Give two examples other than oligopoly that can be explained by the logic of the prisoners’ dilemma.

> How does the number of firms in an oligopoly affect the outcome in the market?

> A firm in a competitive market receives $500 in total revenue and has marginal revenue of $10. What is the average revenue, and how many units were sold?

> Compare the quantity and price of an oligopoly to those of a perfectly competitive market.

> Compare the quantity and price of an oligopoly to those of a monopoly.

> If a group of sellers could form a cartel, what quantity and price would they try to set?

> How might advertising with no apparent informational content still convey information to consumers?

> How might advertising reduce economic well-being? How might advertising increase economic well-being?

> What gives the government the power to regulate mergers between firms? From the perspective of society’s welfare, give one reason that a merger might be good and one reason that a merger might be bad.

> Define natural monopoly. What does the size of a market have to do with whether an industry is a natural monopoly?

> Are market supply curves typically more elastic in the short run or in the long run? Explain.

> Under what conditions will a firm exit a market? Explain.

> Under what conditions will a firm shut down temporarily? Explain.

> Suppose that each firm in a competitive industry has the following costs: Total cost: TC = 50 + 1/2q2 Marginal cost: MC = q where q is an individual firm’s quantity produced. The market demand curve for this product is Demand: QD = 120 – P where P is the

> Explain the difference between a firm’s revenue and its profit. Which do firms maximize?

> What are the main characteristics of a competitive market?

> What is marginal product, and what is meant by diminishing marginal product?

> What is the relationship between a firm’s total revenue, total cost, and profit?

> What is the marginal tax rate on a lump-sum tax? How is this related to the efficiency of the tax?

> Give two arguments why wealthy taxpayers should pay more taxes than poor taxpayers.

> Explain whether each of the following events increases, decreases, or has no effect on long-run aggregate supply. a. The United States experiences a wave of immigration. b. Congress raises the minimum wage to $15 per hour. c. Intel invents a new and more

> Purchasing-power parity holds between the nations of Ectenia and Wiknam, where the only commodity is Spam. a. In 2020, a can of Spam costs 4 dollars in Ectenia and 24 pesos in Wiknam. What is the exchange rate between Ectenian dollars and Wiknamian pesos

> A case study in the chapter analyzed purchasing power parity using the prices of Big Macs in several countries. Here are data for a few more countries: a. For each country, compute the predicted exchange rate in terms of the local currency per U.S. dolla

> Assuming a tax rate of 40 percent, compute the before-tax real interest rate and the after-tax real interest rate for each of the following cases. a. The nominal interest rate is 10 percent, and the inflation rate is 5 percent. b. The nominal interest ra

> The Tax Reform Act of 1986 eliminated the deductibility of interest payments on consumer debt (mostly credit cards and auto loans) but maintained the deductibility of interest payments on mortgages and home equity loans. What do you think happened to the

> Let’s consider the effects of inflation in an economy composed of only two people: Bob, a bean farmer, and Rita, a rice farmer. Bob and Rita both always consume equal amounts of rice and beans. In 2019, the price of beans was $1 and the price of rice was

> Between January 2012 and January 2019, U.S. employment increased by 17.3 million workers, but the number of unemployed workers declined by only 6.3 million. How are these numbers consistent with each other? Why might one expect a reduction in the number

> Explain the difference between saving and investment as defined by a macroeconomist. Which of the following situations represent investment and which represent saving? Explain. a. Your family takes out a mortgage and buys a new house. b. You use your $20

> A dozen eggs cost $0.88 in January 1980 and $1.77 in January 2018. The average hourly wage for production and nonsupervisory workers was $6.57 in January 1980 and $22.36 in January 2018. a. By what percentage did the price of eggs rise? b. By what percen

> A small nation idolizes the TV show The Voice. All they produce and consume are karaoke machines and CDs, in the following amounts: a. Using a method similar to the CPI, compute the percentage change in the overall price level. Use 2020 as the base year

> Suppose that people consume only three goods, as shown in this table: a. What is the percentage change in the price of each of the three goods? b. Using a method similar to the CPI, compute the percentage change in the overall price level. c. If you were

> The residents of Vegopia spend all of their income on cauliflower, broccoli, and carrots. In 2020, they spend a total of $200 for 100 heads of cauliflower, $75 for 50 bunches of broccoli, and $50 for 500 carrots. In 2021, they spend a total of $225 for 7

> Consider the following data on the U.S. economy: a. What was the growth rate of nominal GDP between 1998 and 2018? b. What was the growth rate of the GDP deflator between 1998 and 2018? c. What was real GDP in 1998 measured in 2012 prices? d. What was re

> Below are some data from the land of milk and honey. a. Compute nominal GDP, real GDP, and the GDP deflator for each year, using 2020 as the base year. b. Compute the percentage change in nominal GDP, real GDP, and the GDP deflator in 2021 and 2022 from

> Three friends are choosing a TV show to watch. Here are their preferences: a. If the three friends try using a Borda count to make their choice, what would happen? b. Monica suggests a vote by majority rule. She proposes that they first choose between NC

> Are the following statements true or false? Explain in each case. a. “Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods.” b. “Certain talented people have a comparative advant

> The Affordable Care Act signed into law by President Obama in 2010 included the following two provisions: i. Insurance companies must offer health insurance to everyone who applies and charge them the same price regardless of a person’s preexisting healt

> State whether each of the following statements is true or false. Explain your answers. a. “All Giffen goods are inferior goods.” b. “All inferior goods are Giffen goods.

> Darius buys only milk and cookies. a. In year 1, Darius earns $100, milk costs $2 per quart, and cookies cost $4 per dozen. Draw Darius’s budget constraint. b. Now suppose that all prices increase by 10 percent in year 2 and that Darius’s salary increase

> Raj consumes only cheese and crackers. a. Could cheese and crackers both be inferior goods for Raj? Explain. b. Suppose that cheese is a normal good for Raj while crackers are an inferior good. If the price of cheese falls, what happens to Raj’s consumpt

> Maya divides her income between coffee and croissants (both of which are normal goods). An early frost in Brazil causes a large increase in the price of coffee in the United States. a. Show the effect of the frost on Maya’s budget constraint. b. Show the

> Suppose there are two possible income distributions in a society of ten people. In the first distribution, nine people have incomes of $60,000 and one person has an income of $20,000. In the second distribution, all ten people have incomes of $50,000. a.

> Table 2 shows that income inequality in the United States has increased since 1970. Some factors contributing to this increase were discussed in Chapter 19. What are they?