An Apiary Is Located Next to an Apple Orchard

question 14

Multiple Choice

An apiary is located next to an apple orchard. The apiary produces honey and the apple orchard produces apples. The cost function of the apiary is C_H(H, A) = - 3A and the cost function of the apple orchard is C_A(H, A) = , where H and A are the number of units of honey and apples produced respectively. The price of honey is $2 and the price of apples is $7 per unit. Let A₁ be the output of apples if the firms operate independently, and let A₂ be the output of apples if the firms are operated by a single owner so as to maximize total profit.

• A) A₁ = A₂ = 350.
• B) A₁ = 250 and A₂ = 350.
• C) A₁ = 175 and A₂ = 350.
• D) A₁ = 350 and A₂ = 500.
• E) A₁ = 100 and A₂ = 350.

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Definitions:

Risk-Free Rate

An anticipated gain from an investment devoid of financial risk, frequently illustrated through the returns on state bonds.

Arbitrage

The simultaneous purchase and sale of an asset in different markets to exploit price differences for a risk-free profit.

Mispricing

The occurrence of an asset being priced either higher or lower than its intrinsic value due to market inefficiencies or errors in analysis.

Riskless Profits

Profits made from trading or investing that are deemed to have no risk; often considered unrealistic in practical financial markets.