ECON 106F Lecture Notes - Lecture 3: Expected Return, Risk Aversion, Risk Premium

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26 Apr 2016

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Ch 3 lecture: financial decision making and the law of. How does it relate to the law of one price: calculate the no-arbitrage price of an investment opportunity. Valuing decisions: identify costs and benefits, you may need help from other areas in identifying the relevant costs and benefits. Areas like marketing, economics, organizational behavior, strategy, operations. Time value of money: consider an investment opportunity with the following certain cash flows: pay 100k today in order to get 105k in one years time. This may not be the ideal trade depending on the time value of money (which dictates the difference in value between money today and money in the future) Interest rate (an exchange rate across time): the rate at which we can exchange money today for money in the future is determined by the current interest rate, suppose the current interest rate is 7%.

Related Questions

4. Decisions made âat the marginâ entail a choice based upon_____________ of a decision.

a. the additional benefits
b. the total costs
c. comparing the total benefits and costs
d. comparing the additional benefits and costs
5. 100 units of Good X are available but individuals desire 500units. ______________ will determine who attains Good X, and whodoes not.

a. A rationing device
b. Opportunity Cost
c. Utility
d. Natural Selection

6. Individuals will continue consuming so long as:

a. The price of a good continues to decrease
b. The marginal costs of consuming are outweighed by the marginalbenefits
c. The individual seeks additional utility
d. The individual is willing and able

8. If the cross-price elasticity of two goods is positive, thenthose two goods are
a. substitutes.
b. complements.
c. normal goods.
d. inferior goods.

11. The basic reason most supply curves are upward sloping isthat:

a. More firms are in the market, therefore more goods areproduced.
b. Because more quantity is being demanded, suppliers raise theprice.
c. Producers face higher opportunity costs when producing higherlevels of quantity, so they must receive a higher price.
d. Producers seek to maximize total revenue.

18. When the price of bubble gum is $0.60, the quantity demanded is500 packs per day. When the price falls to $0.50, the quantitydemanded increases to 900. The demand for gum would beconsidered:

a. inelastic.
b. elastic.
c. unit elastic.
d. perfectly inelastic.

20. Inefficient Production implies which of the following:

a. it is impossible to produce more of one good without producingless of another
b. there are too few resources
c. there are too many resources
d. it is possible to produce more of one good without producingless of another

21. Workers at a bicycle assembly plant currently make minimumwage. If the federal government increases the minimum wage by $1.00an hour it is likely that the

a. demand for bicycle assembly workers will increase.
b. supply of bicycles will shift to the right.
c. supply of bicycles will shift to the left.
d. firm must increase output to maintain profit levels.

24. Suppose at a price of $5 and at a price of $9, John purchases40 units of good X. Given this information, we know that Johnâsdemand for good X is
a. perfectly elastic at all prices.
b. inelastic at all prices.
c. unit elastic between the prices of $5 and $9.
d. perfectly elastic between the prices of $5 and $9.
e. perfectly inelastic between the prices of $5 and $9.

25. If the price of good A decreases by 10 percent and the quantitydemanded of good B decreases by 10 percent, this is evidence that Aand B are
a. substitute goods.
b. complement goods.
c. inferior goods.
d. normal goods.
e. not related.

6. For an individual to achieve consumer equilibrium when consumingtwo goods, A and B, the individual must satisfy the followingcondition:

a. TUA = TUB
b. TUA/PA = TUB/PB
c. MUA = MUB
d. MUA/PA = MUB/PB
e. MUA/PB = MUB/PA

7. Which of the following statements is correct regarding a firm'sdecision making?
a. The decision to shut down and the decision to exit are bothshort-run decisions.
b. The decision to shut down and the decision to exit are bothlong-run decisions.
c. The decision to shut down is a short-run decision, whereas thedecision to exit is a long-run decision.
d. The decision to exit is a short-run decision, whereas thedecision to shut down is a long-run decision.

Table 1

Output Total Cost
0 $20
1 $30
2 $41
3 $51
4 $65
5 $75
6 $84
7 $105

13. Refer to Table 1. The marginal cost of producing the fifth unitof output is
a. $55.00
b. $15.00
c. $9.00
d. $10.00

21. A perfectly competitive firm can produce its current level ofoutput at an average total cost of $10 and a marginal cost of $8.If the market price of the product is currently $8, what should thefirm do?

a. The firm should definitely shut down since average total costexceeds price.
b. The firm should shut down if average variable cost is $8 orgreater, but the firm should continue to produce the current levelof output if average variable cost is less than $8.
c. The firm should increase production in order to increaseprofit.
d. The firm should continue to produce, but it should decreaseproduction in order to increase profit.
24. In the long run all costs are variable. Thus, aprofit-maximizing firm may exit:

a. When Price < Average Total Cost
b. When Price > Average Total Cost
c. When Average Revenue > Average Fixed Cost
d. When Average Revenue > Marginal Cost

25. Marginal cost tells us the
a. value of all resources used in a production process.
b. marginal increment to profitability when price isconstant.
c. amount by which total cost rises when output is increased by oneunit.
d. amount by which output rises when labor is increased by oneunit.

26. For a perfectly competitive firm:
a. marginal revenue is equal to price.
b. price is equal to marginal cost at the output level thatmaximizes profit.
c. selling an additional unit of the good it produces increasestotal revenue by the price of the good.
d. a and b
e. a, b, and c

***Need response by Friday evening or Saturday at the latest!!! These are the details. That's all the instructions that came with the assignment. I'm not sure what else to post. I've got several responses requesting for details. This is it! I need the number portion completed where it says assignment. Please and thank you! This is my 4th time posting. No one has helped me. I followed all the 2 suggestions from the previous folks who offered pointers and still nothing. Someone please help! :(

Overview of the module requires that you run a simulation over an 18-year period, and that you analyze the outcome of the decisions you make at each decision point. In this course, we will be using the MIT Solar Power Pricing Simulation. Read the following introduction to the SunPower case: The Industry Evolution Management Flight Simulator portrays the growth and competition of firms as an industry evolves. Playing the role of chief executive for one of the firms in the industry, you make key decisions involving pricing, investment and marketing in order to succeed in the marketplace. This version of the simulator has been customized to portray the solar power industry, specifically SunPower and other manufacturers of photovoltaic panels (PVs). While historically the cost of electricity from PV panels has limited them to niche applications, there is massive potential for growth in the market if solar power could become a viable alternative to traditional sources of electricity. In the simulator, your job is to maximize SunPower's cumulative profit over a period of eighteen years. To do this, you make pricing and investment decisions each simulated time period. As a young company with a new innovation, you will start the game with a technology that you hope stays proprietary. In theory you can reap the benefits of technological advancements from the rest of the industry while spreading your advancements to them. In addition, you (or your administrator) have the option of setting several other competitive and market scenarios, including the sources and rates of learning, the strength of knowledge spillovers, entry of new competitors, and external incentives that help to drive consumers towards using solar power. You will receive periodic reports including your income statement and industry data. You need to select your strategies based on those reports, your understanding of the underlying industry structure, and your best judgment about how your competitor and customers may respond. Though the model has been carefully calibrated and tested, it is not designed to predict the future or exactly match the history and special circumstances of SunPower. Rather, it is used to illustrate competitive dynamics important not only in the photovoltaic panel industry but in other contexts you may face. Instead of merely "beating the game," focus on understanding the underlying industry structure so you can develop robust, successful strategies. *** Source: Sterman, J. (2014). Eclipsing the competition: The Solar PV industry simulation. Forio. Retrieved on November 23, 2014 from http://forio.com/simulation/solar-test/index.htm#page=market_research Be sure to review the SunPower case study, as it will provide you with background and context for the simulation: http://forio.com/simulation/solar-test/downloads/SunPower-Henderson.pdf Then, visit the simulation here: http://forio.com/simulation/solar-test/index.htm#page=market_research At the landing page, click on âPlay as an INDIVIDUAL.â Then, choose a Screen ID and click âSubmit.â Familiarize yourself with the simulation. This will require that you get an in-depth understanding of the terminology used in the simulation, as well as the pricing and cost structure of the product. As you begin this simulation (Year 1), your market share is only 2.40%. Your role with the company is to expand your companyâs market share over the multi-year period of operations â while recognizing the highest possible cumulative profit. To do this, you must make favorable pricing decisions, and you must ensure that you are improving your product while simultaneously lowering unit costs. Product improvements are determined by the % of revenue allocated to process improvement (i.e., technological advancement = lower unit costs).

**Helpful link: Should you need to brush up on financial analysis, the following presentation provides a very good overview of financial statement analysis: http://vrpacioli.loyola.edu/ac102/chapter17/chapter17.ppt

**This is the piece below I need help with! Not the paper just the number portion of this assignment.

**Assignment Run the simulation, entering the following data into the simulation for each of four decision points (NOTE: Do not change the assumptions displayed in the âSettingsâ tab): 1) Decision 1: For Years 2008-2012

a) Pricing â Manual

b) Module Price - $0.15

c) Revenue to Process Improvement â 5%

d) Years to Advance â 5 years

2) Decision 2: For Years 2013-2017

a) Pricing â Manual

b) Module Price - $0.13

c) Revenue to Process Improvement â 5%

d) Years to Advance â 5 years 3) Decision

3: For Years 2018-2022

a) Pricing â Manual

b) Module Price - $0.11

c) Revenue to Process Improvement â 5%

d) Years to Advance â 5 years

4) Decision 4: For Years 2023-2025

a) Pricing â Manual

b) Module Price - $0.09

c) Revenue to Process Improvement â 5%

d) Years to Advance â To end At each of the four

(4) decision points above, you are required to analyze the impact of your Module Price on market share and total profits. You are also required to determine how process improvements reduce unit costs over time.

Instructions:

Be sure to copy tables and charts into your Word document to support your analysis. You may need to use Excel to edit the charts and tables.

1. Marketing traditionally has been divided into a set of fourinterrelated decisions known as the marketing mix, or four Ps,including all of the following EXCEPT:
A. product
B. place
C. performance
D. promotion
E. price

2. Marketers want their firms to develop efficient operationsbecause this kind of efficiency:
A. usually leads to lower prices or greater pricingflexibility.
B. allows the firm to offer greater value to customers.
C. makes it easier to get the products customers want to them whenthey want them.
D. can lead to more attractive margins.
E. All of these

3. The Ethical Decision-Making Framework includes all of thefollowing steps EXCEPT:
A. identify issues.
B. promote the firm's corporate social responsibilityefforts.
C. gather information and identify stakeholders.
D. brainstorm and evaluate alternatives.
E. choose a course of action.

4. The centerpiece of the Marketing Environment Analysis Frameworkis:
A. green marketing.
B. corporate partners.
C. culture.
D. competitive intelligence.
E. consumers.

5. Most "big box" retailers regularly move products from one aisleto another. They also put personal care products in the pharmacyarea, many aisles away from the grocery products. They do thisbecause consumers who spend more time walking through the store arelikely to make:
A. impulse purchases.
B. limited problem solving decisions.
C. extended problem solving decisions.
D. ritual consumption purchases.
E. affective alternative decisions.

6. Edward, the leading salesperson for Harry's Honda dealership,began hearing customers asking for hybrid automobiles several yearsago. Edward alerted Harry, and Harry pre-ordered many Honda hybridsbefore they became available. In this case, the source of needrecognition was:
A. trade show demonstrations.
B. ads in trade journals.
C. customers.
D. the Internet.
E. suppliers.

7. One of the reasons marketers use loyalty segmentation is:
A. the high cost of finding new customers.
B. government tax incentives for loyalty.
C. accounting difficulties associated with identifying newcustomers.
D. rapid population increases.
E. the failure of micromarketing as a workable strategy.

8. Matt was passionate about Abercrombie & Fitch. It was theonly place he'd buy his clothes. If anyone asked him about clothes,he would talk for what seemed like hours about why he only shoppedthere. From a strictly marketing perspective, this word of mouth ispart of:
A. social insistence.
B. brand loyalty.
C. self-actualization.
D. motivation.
E. brand extension.

9. When Procter & Gamble added teeth whitening products underthe Crest brand, the firm was engaged in:
A. corporate branding.
B. brand extension.
C. brand licensing.
D. brand association.
E. perceived value branding.

10. By the time BMW and Mercedes Benz entered the mini-SUV market,there were many competitors, sales had peaked, and profits weredeclining. These firms entered the market during the ______________stage of the product life cycle.
A. introduction
B. leveling
C. maturity
D. growth
E. decline

11. By providing good customer service, firms __________ theirproducts or services.
A. eliminate the communication gap for
B. add value to
C. reduce the zone of tolerance for
D. reduce the empowerment cost associated with
E. increase the perishability of

12. Collecting information at the point of sale is astraightforward and inexpensive way to assess service quality, butthis approach will NOT be useful if:
A. customers cannot assess service quality, as in the case of oilchange or maintenance check.
B. decision-making managers do not get the results of thefeedback.
C. the person who rendered poor service is the same personcollecting the information.
D. customers are rushed and don't take the time to assess theservice.
E. All of these.

13. Ryan gave the manager of his convenience store a set ofbinoculars so she could see the gasoline prices charged by theother convenience store at that intersection. Ryan told the managerto always match the gasoline prices of the other store. Ryan isusing a _____________________ pricing strategy.
A. maximizing profits
B. target profit
C. target return
D. status quo
E. sales

14. At the break-even point:
A. costs are zero.
B. price is maximized.
C. profits are zero.
D. fixed costs are zero.
E. contribution per unit is zero.

15. For marketers to advertise a price as their ______________, theBetter Business Bureau recommends that at least 50 percent of thesales of a product occur at that price.
A. fixed price
B. zone price
C. regular price
D. leader price
E. cost-based price

16. Brenda is working on an automated re-ordering system which willelectronically re-order inventory for her shoe store as purchasesare made. Brenda is working on a supply chain management systemthat will:
A. provide products at the right time.
B. provide products at the right locations.
C. provide the right quantities.
D. minimize system-wide costs.
E. all of these.

17. A manufacturer of high-end products might consider sellingproducts in a warehouse club if:
A. there are no high-end shopping centers within a 100-mile radiusof the warehouse club.
B. the warehouse club has a good reputation.
C. the manufacturer is trying to increase market share.
D. the manufacturer overestimated demand or has a great deal ofreturned merchandise from other retailers.
E. the warehouse club wants to upgrade its image.

18. Because of the way _______________ buy merchandise, customerscan never be confident that the same merchandise will be in stockeach time they visit the store.
A. department stores
B. off-price retailers
C. discount stores
D. downstream value stores
E. category specialist stores

19. The basic goal of integrated marketing communications isto:
A. communicate the value proposition to the target market.
B. create desire.
C. manipulate consumers.
D. outspend competitors.
E. tell the world about your company.

20. The sender of an integrated marketing communication:
A. must work with the advertising specialists to ensure allrecipients interpret the message accurately.
B. can assess the manner in which receivers interpret the messagethrough gross rating points.
C. has little control over what meaning any individual receiverwill take from the message.
D. controls the meaning all receivers take from the message.
E. generally uses a rule-of-thumb interpretation index.

21. In the AIDA model:
A. advertising leads to interest, which hopefully leads to desireand then, action.
B. awareness leads to integration, which hopefully leads to desireand then, action.
C. awareness leads to interest, which hopefully leads to desire andthen, action.
D. awareness leads to interest, which hopefully leads to desire andthen, attention.
E. awareness leads to interest, which hopefully leads todetermination and then, action.

22. When Microsoft introduces a new version of its Windowsoperating system, it typically uses selected magazine, Internet,and direct mail advertising. This combination of advertisingoutlets represents Microsoft's:
A. niche buy.
B. advertising plan.
C. media mix.
D. track testing.
E. supply chain messaging.

23. _____________ advertising has the advantages of being highlytargeted and offering opportunities for personalization.
A. Television
B. Radio
C. Direct mail
D. Outdoor
E. Newspaper

24. In the United States, the regulation of advertising involves acomplex mix of laws and informal restrictions designed to:
A. protect consumers from deceptive practices.
B. stimulate domestic demand.
C. reduce international competition.
D. promote social marketing.
E. institutionalize pull strategies.

25. _________________ is a sales philosophy and process thatemphasizes a commitment to maintaining and investing in long-term,mutually beneficial business relationships.
A. Organizational buying
B. Cold calling
C. Psychographic selling
D. Relationship selling
E. Sales management

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ECON 106F Lecture Notes - Lecture 3: Expected Return, Risk Aversion, Risk Premium

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