ECON5026 Mid semester test
Practice questions Part B
Sample Descriptive questions
Suppose you have been investing in a bundle of selected stocks (Y). You are aware of your expected
returns [E(Y)] and investment volatility measured by standard deviation (σ) such that E(y) =
$1000 + σ . For any given value of σ = $500, explain your certainty equivalent and risk premium? (Use an appropriate fully labelled diagram in your answer). [6 Marks]
Consider that a firm embarks on a month-long sales campaign with flexible pricing options for LED televisions and sound systems. There are four customers with valuations for each of these products as indicated in the table below:
|
Customer
|
LED Televisions
|
Sound System
|
|
Wang
|
1300
|
500
|
|
John
|
1000
|
1000
|
|
Khan
|
500
|
1200
|
|
Jessica
|
1600
|
1000
|
The marginal and average cost of making a LED television is $900, and the marginal and average cost of making a sound system is $600.
Explain the optimal pricing strategy of the firm if:
(i) there is no budling
(ii) bundling of the two products
(iii) a mix or optional bundling.
How much profit will the company make in each case? (Show your work detail.)
[7 Marks]