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:

Net Operating Income

The total profit of a business after operating expenses have been deducted, but before taxes and interest.

Variable Costing

An accounting method that includes only variable production costs (direct materials, direct labor, and variable manufacturing overhead) in the cost of goods sold, excluding fixed manufacturing overhead.

Contribution Margin

The gap between sales income and variable expenses, showing the extent to which income aids in offsetting fixed expenses and creating earnings.

Cost-Volume-Profit

An analysis tool used to determine how changes in costs and volume affect a company's operating income and net income.