Firm X Is Currently Selling a Consumer Good and Faces

question 7

Essay

Firm X is currently selling a consumer good and faces two related decisions, one with respect to pricing and the other with respect to marketing. With respect to pricing, it can maintain its "standard" price or it can adopt a lower "discount" price. With respect to marketing, it can keep with its current advertising campaign or it can expand its advertising. The main risk facing the firm concerns the course of the economy in the near-term: whether the economy will continue healthy growth or whether it will experience a recession. The table below shows the firm's possible profit results (in $ millions) depending on its price and advertising actions. Finally, the firm judges that there is an 80% chance of growth and a 20% chance of a recession.
$\begin{array}{lcc}&\text { Growing}&\text { Recession }\\&\text { Economy}&\\\text { Standard P + Level Ads } & 25 & -20 \\\text { Discount P + Level Ads } & 15 & 0 \\\text { Standard P + Increased } & 30 & -45 \\\text { Ads } & & \\\text { Discount P + Increased } & 20 & -10\\\text { Ads } & & \end{array}$

(a) Firm X must make its decision now (before knowing the future course of the economy). Which of the four alternatives maximizes its expected profit?

Calculate and interpret the default risk premiums on corporate bonds.

Analyze the impact of varying interest rates on yield and the implications for bond investors.

Understand the concept and financial mechanics behind tranches in Collateralized Debt Obligations (CDOs).

Differentiate between various mortgage pass-through agencies and their role in the housing finance system.

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Definitions:

Criminal Activity

Acts that violate legal statutes and are punishable by the authorities.

Loose Associations

A common thinking disturbance in schizophrenia, characterized by rapid shifts from one topic of conversation to another. Also known as derailment.

Digressive Language

Language that deviates or diverges from the main topic or line of argument.

Schizotypal Personality Disorder

A psychiatric condition marked by intense fear of social interactions, disturbed thoughts, paranoia, feelings of unreality, temporary psychotic episodes, and frequently, unusual beliefs.