Assume We Have a Stock Currently Worth $50

question 113

Multiple Choice

Assume we have a stock currently worth $50. We also assume the interest rate is zero, and we can buy options for this stock with a strike price of $50. If the stock can rise or fall by $10 with equal probability over the option period, and the option cannot be exercised until the expiration date, what is the time value of the option?

• A) $5
• B) $10
• C) $50
• D) $40

Recognize the role of equilibrium in determining market outcomes, including consumer and producer surpluses.

Identify the impact of externalities on market efficiency and the corresponding government interventions.

Understand the concept of allocative efficiency and how it is achieved in competitive markets.

Comprehend the implications of economic efficiency and external benefits for market outcomes.

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Definitions:

Cognitive Schema

A mental framework that helps organize and interpret information in the world around us.

Concept

A mental category that groups objects, relations, activities, abstractions, or qualities having common properties.

Mental Set

A tendency to approach situations in a certain way because that method worked in the past.

Algorithm

A set of rules or steps designed to solve a problem or accomplish a task, often used in computer programming and mathematics.