Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade. Each company's stock currently sells for $100 per share. If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change. If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change. There is a 50% chance that it will be colder than average next year, and a 25% chance that it will be warmer than average. If you purchase one share of ABC stock and one share of XYZ stock, your expected gain will be ________.
A. $0
B. $40
C. $10
D. $15
Answer: D
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For which of the following will the law of one price hold best?
A) shirt B) butter C) gold D) milk
A bank that mismatches its asset and liability maturities is
A) trying to reduce credit risk. B) willingly accepting greater credit risk. C) essentially engaging in interest-rate speculation. D) trying to protect itself against interest rate movements.
Price floors and price ceilings
A) always reduce total surplus. B) reduce consumer surplus and increase producer surplus. C) reduce producer surplus and increase consumer surplus. D) Not enough information to determine.
Suppose there was a debate regarding how to spend $1 billion in newly found revenues in the budget. Suppose the centrist Democrat suggests an increase to infrastructure spending. Suppose the centrist Republican suggests an increase in cyber-defense spending. The Democrat says that, on average, infrastructure spending does the most good, so more is better. The Republican is arguing that the extra cyber-security purchased by the extra spending will increase well-being the most. What is going on here?
A. Both are employing marginal analysis, just from different perspectives. B. Only the Republican is using marginal analysis. C. Neither are using marginal analysis. D. Only the Democrat is using marginal analysis.