The Daily Price of a Farm Commodity Is Up, Down

question 42

Essay

The daily price of a farm commodity is up, down, or unchanged from the day before. Analysts predict that if the last price was down, there is a .5 probability the next will be down, and a .4 probability the price will be unchanged. If the last price was unchanged, there is a .35 probability it will be down and a .35 probability it will be up. For prices whose last movement was up, the probabilities of down, unchanged, and up are .1, .3, and .6.
a.Construct the matrix of transition probabilities.
b.Calculate the steady state probabilities.

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Definitions:

Allocative Efficiency

A state of the economy in which resources are allocated in a way that maximizes the overall benefit to society, with goods and services produced at their highest-valued uses.

Purely Competitive

A market format where numerous small companies offer an identical product with no barriers to entering or leaving the market, resulting in firms accepting the market price as given.

Marginal Benefit

The further utility or pleasure gained from consuming one additional unit of a good or service.

Creative Destruction

A concept in economics introduced by Joseph Schumpeter, describing the process by which old industries or technologies are destroyed and replaced by new ones.