Quiz 2 Econ 308 Managerial Economics

Back of Room (JH PM) Seat Row George, Matthew D Amador, Israel Toscano, Jason Proodian, Arerk Carroll, Bryan M Hernandez, Jose E Ceja, Alfonso Odenthal, Dorothea K Iwamoto, Kosuke Camacho, Salvador 2 Tsirkind, Dmitriy M Mazian, Harry Montano, Shylo A Joumblat, Jason SVu, Nam G Pineda, Joshua P Jahan, Ishrat Adams, Bridgette L Corpus- Orjalo, Madolore s B Wolcott- Shulman, Ian G 3 Nagbe, Sompon Bartamian, Abraham K Santatikul, Scott A Solway, Gavin W Alvarado, Christopher G Druar, Rosemary A Takegawa, Chiaki Faramarz i, David J Street, Joseph B Caraos, Patrick Hans L 4 Rodriguez, Tanisha R Sapien, Joseph JSoto, OniceHines, Ros Grechanik, Ernest Oseguera, Manuel Tamayo, Johnathan D Sirisawad di, Sawaddi bhan Mailyan, Daniel 5 Ramirez, Jorge I Geoulla, Bryan M Gumushyan, GrigorHo, Tsz Hin Lares, Robert J Paul, Joshua S 6 Guerrero, Elsa L Woo, Paul S Garcia, Ana G San Juan, Rosalyn I Camarena, Jasmin C Butchko, Allison M

Consumption today $100K 100K +1 20K/1.05=$214, K+100K(1.o5) =225K $120K Starting Income. Consider an individual who earns $100,000 today and expects to earn $120,000 next year. Draw his inter-temporal budget constraint if the interest rate is 5%. Compute and label the values for the vertical and horizontal intercepts and current and future consumption on your budget line. Draw indifference curves if he prefers to consume exactly as much today as he consumes in the future. Put the amounts of current and future consumption on the horizontal and vertical axes. Suppose this person lived in Japan and the factory where he works was swept away by the recent Tsunami. He loses his job today and expects that next year he will only earn half as much. Draw his inter-temporal budget constraint. Draw indifference curves and indicate how the amount he borrows or saves changes as a result of the tsunami. Suppose the increase in the supply of bonds by firms trying to rebuild after the tsunami increases the interest rate to 10%. Redraw your inter-temporal budget constraint. Draw indifference curves to show how the person adjusts to the higher interest rate and indicate on your graph the change in current borrowing or lending. Even income: 120,000-X=100,000 + X/(1+i) 120,000-X=100,000 + X/ ,000=X+X/ ,000(1.05)=2.05X X= , $109, $60K Even income: 60,000-X=0 + X/(1+i) 60,000-X= X/ ,000=X+X/ ,000(1.05)=2.05X X=30, $

Consider the two economic models used to explain interest rates from the textbook- the Liquidity Preference Framework and the Theory of Asset Demand. 1.Use the graphs below and compare and contrast predictions about the change in interest rates due to the Tsunami. Specifically show the effect of the following: 1.Increased borrowing by firms whose plants were damaged or destroyed by the tsunami. 2.Changes in the borrowing or lending by individuals whose property was destroyed by the tsunami. 3.An increase in the money supply by the Japanese government. 4.The change in income caused by the disruption of economic activity by the Tsunami. Do both models predict the same change in interest rates, i.e. an increase or a decrease in rates? If the predictions vary explain the reason for the discrepancy

Reduction in Wealth/Income Increased investment to replace destroyed property. Increased govt. deficits

A one time increase in the money supply will initiate a chain of events that will effect interest rates over time as the relative strength of two effects changes.  A one time increase in the money supply will cause prices to rise to a permanently higher level by the end of the year. The interest rate will rise via the increased prices.  Price-level effect remains even after prices have stopped rising.  A rising price level will raise interest rates because people will expect inflation to be higher over the course of the year. When the price level stops rising, expectations of inflation will return to zero.  Expected-inflation effect persists only as long as the price level continues to rise. Reduction in Wealth/Income

Consider the time path of the price of shares in the Galleon Hedge Fund and the share price of a company about which Galleon was allegedly receiving inside information around the time an announcement was made that positively impacted the underlying company’s share price. Assume that Galleon bought a large number of shares in the underlying company prior to an announcement that caused share prices to increase. Also assume that investors had noted that Galleon had a history of “beating the market” by buying shares of companies whose prices appreciated after positive news was announced and selling shares of companies prior to announcements that lowered share prices.  Draw the time path of the market price of Galleon and the price of a company which Galleon allegedly received inside information about that is consistent with 4 scenarios: Galleon having inside information and the company not leaking it prior to the announcement. Galleon not having inside information and the company not leaking it prior to the announcement. Galleon having inside information and the company leaking the same inside information prior to the announcement. Galleon not having inside information and the company leaking the same inside information prior to the announcement.  Suppose that you are the lawyer defending Galleon from insider trading charges. Which time paths can be used in combination with the Theory of Efficient Markets to defend Galleon? Explain.  Suppose that you are an investor and are considering investing in Galleon. What time paths would make you invest in Galleon? Explain. Question 3

Question 3. Time Price Announc ement Galleon1 Company Stock 3 days before 1. If Galleon had inside knowledge and the company didn’t leak the price would be bid up partially prior to the announcement as Galleon bought company shares. Galleon1 Company Stock If Galleon didn’t have inside knowledge and the company didn’t leak the information. Galleon1 Company Stock If Galleon had inside knowledge and the company leaked the information then the price of Galleon. Galleon1 Company Stock If Galleon didn’t have inside knowledge and the company leaked the information.

Summary Statistics. Summary Stats First Exam First Exam with QuizzesQuiz 1Quiz 2 Mean σ Count GradeScoreσCount% A % B % C40(0.25)1332% D35(0.50)25% F0 717%

Online Grade Roster Alias Current Course Score Current Course Grade Normali zed First Exam Score Grade Exam Score Plus Added Points. Exam Score Points Added to First Exam Interest Rate Experim ent Quiz 2Quiz 1 Part 1Quiz 1 Part 2 Normaliz ed Aplia Score Aplia Grad e Aplia Total Aplia: What Is Money? II (15) A 2.31 A A A 2.00 A A A 1.69 A A A 2.21 A B B 1.15 B A B 1.79 A B B 1.54 A B B 1.74 A B B 0.81 B A B 2.63 A (0.5)C B 0.96 B A B 1.48 B C6112

Administrative Details. Mandatory one week cooling off period. No discussion of quizzes, exams, or anything that effects your graded until next Wed.