Two Bottles of Over-The-Counter Pain Reliever Sit Side-By-Side in a Grocery

question 593

Multiple Choice

Two bottles of over-the-counter pain reliever sit side-by-side in a grocery store: Advil (a brand name) sells for $5.00, while Feel Better (not a brand name) sells for $2.50. In a typical day the store sells some of each type of pain reliever, which suggests that

• A)no rational consumer would spend twice as much for Advil as he would for Feel Better.
• B)some consumers must perceive that Advil is a higher quality product.
• C)Advil has no incentive to maintain the quality of its product just because of the Advil brand name.
• D)Advil spends money on advertising to reduce competition in the market.

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Definitions:

Put Option

A financial contract that gives the buyer the right, but not the obligation, to sell an underlying asset at a specified price within a certain timeframe.

Exercise Price

Exercise price is the specified price at which the holder of an option can buy (call) or sell (put) the underlying security or commodity.

Volatility

A statistical measure of the dispersion of returns for a given security or market index.

Delta

A measure in options trading that indicates how the price of an option is expected to change relative to a one-unit change in the price of the underlying asset.