Mention some applications of real options
Real options have numerous applications. For example, a project whose size can be scaled up or down after construction may be worth more than one that you cannot alter. Oil in a storage tank and oil underground both have option values because you have a choice of when to use or extract them.The right to prepay a home mortgage has option value. A plant that can be cheaply shut down for short periods can be worth more than one that must run continuously. High stock prices of new biotechnology firms may reflect the relative ease with which they can undertake and abandon research programs, compared with established pharmaceutical producers that operate on larger scales. Going beyond markets, you might decide whether to file a lawsuit by treating it as an investment and seeing if the expected present value of your winnings is worth the cost. The right to settle or abandon the suit as information develops over the course of the case adds option value to it.53 On a more somber note, there is an option value to flexibility in choosing the time to start a war and in making decisions to continue or abandon it.
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Four propane delivery firms have a tacit agreement to charge a service fee of $50 in addition to $5 per gallon of propane. If the firms' cost of propane increases and one of the four firms advertises that it will increase the service fee to $75 next month, this is an example of ________.
A) a preannouncement B) a precommitment C) a meet-the-competition clause D) price leadership
Which of the following results from patients having better information about their health status than insurers?
a. The principle-agent problem b. Rational ignorance c. Adverse selection d. Externalities e. The substitution effect
The perfect competitor's demand curve is
A. perfectly elastic. B. relatively elastic. C. relatively inelastic. D. perfectly inelastic.
Broadly defined, competition involves:
A. private property and freedom of expression. B. independently acting buyers and sellers and freedom to enter or leave markets. C. increasing opportunity costs and diminishing marginal utility. D. capital goods and division of labor.