Throughout this problem, assume that an investor is contractually barred from purchasing asset Y in the current period (period 0). However, the investor is free to short-sell asset Y in period 0. Suppose the price of asset Y in period 0 is $200 and this asset will pay a dividend of $6 one year from now in period 1. Let the interest rate from period 0 to period 1 be 4%.
Assume the price for a futures contract with delivery in period 1 is $210. Can the investor make an arbitrage profit when this is the price? If so, state specifically what financial transactions she would make in period 0 and period 1 to realize a profit. If not, explain why not.
Now, assume the price for a futures contract with delivery in period 1 is $190. Can the investor make an arbitrage profit when this is the price? If so, state specifically what financial transactions she would make in period 0 and period 1 to realize a profit. If not, explain why not.
Throughout this problem, assume that an investor is contractually barred from purchasing asset Y in the current period (period 0). However, the investor is free to short-sell asset Y in period 0. Suppose the price of asset Y in period 0 is $200 and this asset will pay a dividend of $6 one year from now in period 1. Let the interest rate from period 0 to period 1 be 4%.
Assume the price for a futures contract with delivery in period 1 is $210. Can the investor make an arbitrage profit when this is the price? If so, state specifically what financial transactions she would make in period 0 and period 1 to realize a profit. If not, explain why not.
Now, assume the price for a futures contract with delivery in period 1 is $190. Can the investor make an arbitrage profit when this is the price? If so, state specifically what financial transactions she would make in period 0 and period 1 to realize a profit. If not, explain why not.
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Monetary Policy
Go to http://www.tradingeconomics.com/indicators to help find the current values.
1.What are the components of M-1?
2. What is the total value of M-1 for the most recent period? _________________
3. What are the additional components of M-2?
4. What is the total value of M-2 in the most recent period? ___________________
5. Explain in your own words why a decrease in the reserve requirement, say from 10% to 9%, would cause the money supply to increase.
6. Explain in your own words why a decrease in the discount rate from 3% to 2% would cause the money supply to increase.
3. A jeans manufacturer hires workers to sew jeans in its factory and derives the following daily yields of total product, or jeans output (in pairs):
|
Factory Worker (day) |
Total Product |
Marginal Product |
|
|
|
|
|
|
|
0 |
0 |
|||||||
|
1 |
5 |
5 |
$150 |
$ 90 |
$ 60 |
|||
|
2 |
15 |
10 |
300 |
90 |
210 |
|||
|
3 |
20 |
5 |
150 |
90 |
60 |
|||
|
4 |
23 |
3 |
90 |
90 |
0 |
|||
|
5 |
24 |
1 |
30 |
90 |
- 60 |
|||
|
6 |
23 |
-1 |
- 30 |
90 |
- 120 |
Assuming the price of jeans is $30 per pair and each worker is paid $90 per day (assume this is the ONLY cost per day) if the jeans manufacturer acts to maximize profit, how many pairs of jeans will be produced?
How many workers will be employed?
What will the jean manufacturer's profit be at this output level?
Why? (State the key condition used in your analysis and show all work in the table above.)
Now assume that each worker's wage drops to $30 per day. What is the new profit-maximizing total output?
How many workers are hired at this level?
Why?
