Briefly describe the different conditions which affect the value of a real option
Real options are often unique to particular projects, and their strike prices are not always easy to uncover. It gives the holder the right to postpone an investment on the basis of a net present value calculation. The value of the real option varies with the underlying conditions as discussed below.
a) Greater range of outcomes - the greater the range of uncertainty that can be resolved, the higher the value of an option to delay.
b) Higher interest rate - Assume that interest will be 15 percent rather than 10 percent over the future. A higher interest rate indicates a stronger preference for a given payment in the near future relative to the distant future, and the present value of the income stream discounted at 15 percent is less than that of the same stream discounted at 10 percent.
c) Longer delay in resolving uncertainty - The option value model tells us the maximum premium you should pay for the right to resolve the uncertainty in one year rather than two.
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What is the equation for the demand (which is also MR) faced by the individual farmer?
In the competitive market for organic corn, market demand is QD = 340 – 2P and market supply is QS= 100 + 4P, where P is the price per bushel, and Q is market output in thousands of bushels. Each individual farmer faces a marginal cost function of MC = 10 + 3q, where q is the single farmer’s output level in thousands.
The concept of human capital describes
A) human skills, that is, the quality of labor. B) human population, that is, the quantity of labor. C) the number of machines per employed worker. D) the number of workers per operating machine. E) the number of machines (capital) that have been produced by people (humans).
Concord Piano Company has experienced a sustained pattern of losses because fewer people are buying pianos for their homes. In response, the owner of Concord has reduced the number of pianos it manufactures. Which of the following is suggested by the actions of Concord?
a. Concord is reducing its marginal costs. b. Concord is preparing to exit the market. c. Concord has reached the shutdown point. d. Concord is evaluating its allocative efficiency.
Which of the following is not an argument in favor of reforming the tax laws to encourage saving?
a. Saving is a key determinant of long-run prosperity. b. Current tax laws discourage saving for the purpose of leaving a large bequest. c. The substitution effect of a higher return to saving may be about equal to the income effect of a higher return to saving. d. The tax code currently taxes some forms of capital income twice.