Economics Answers

What is an expected utility function? What are the important properties that an expected
utility function has?

Discuss Markowitz’s portfolio theory of asset pricing. Critically examine the efficientmarkets
hypothesis.

Critically examine the Quantity Theory of Money as a theory of the demand for money
and contrast it with the Keynesian theory of the demand for money.

Consider a representative consumer who is allocating her budget between housing and clothes. Her utility function is = . where is housing and is clothing. The price of housing is equal to 5 and the price of clothing is equal to 1. Initially the consumer starts out with a total budget M = 10.

A. Please state the consumers budget constraint.

B. Please find the consumers marginal utility of housing (MU#$) and his marginal utility of
clothing (MU%&)

C. Find the optimal consumption bundle of clothing and housing. Please show all the steps of your calculation (hint: use the condition ’()$ = ’()&).
*$ *&

D. Please find the optimal consumption bundle if the consumer total budget is 50

E. Use your answers from above to sketch the Engel curve for housing and clothing.

F. Is housing a normal or an inferior good for the representative consumer (base your answer on the Engel curve).

Outline the major factors that determine the type of economic system existing in a country. Based on the factors describe the principle differences between Australian economy and Chinese economy( max 300 word)

why is the following true?

If an increase in the supply of good A decreases the demand for good B, then good A and good b are substitutes.

Given the following information, assess whether the interest rate parity condition holds




Where S is spot exchange rate, F is forward exchange rate is domestic interest rate, is foreign interest rate

if bank X is quoting “A$1.5838/€ bid and A$1.1682/€ ask” and bank Y is quoting “A$1.1684/€ and A$1.1690/€ ask”. If you buy € 2 Million from X simultaneously sell € 2 Million to Y. Calculate arbitrage profit

iA stock price is currently selling at sh. 50. It is known that at the end of six months it will be either sh. 45 or sh. 55. The risk-free rate is 10% per annum with continuous compounding. What is the value of a six-month European call option with a strike price of sh. 50?

Your company wishes to raise a new debt capital on stock market. Your managing director has heard of warrants and traded options and suggests that an issue of debt, accompanied by either attached warrants or traded options might be attractive to investors and have benefits for your company.

Required:
Discuss whether you consider your managing director’s suggestions to be useful. (10 Marks)