Supply and Demand and Demand Curve
TUTORIAL 2:
Topic 1: The Firm and Its Goals 1) a. If a stock is expected to pay an annual dividend of $20 forever, what is the approximate present value of the stock, given that the discount rate is 5%? b. If a stock is expected to pay an annual dividend of $20 forever, what is the approximate present value of the stock, given that the discount rate is 8%? c. If a stock is expected to pay an annual dividend of $20 this year, what is the approximate present value of the stock, given that the discount rate is 8% and dividends are expected to grow at a rate of 2% per year?
Answer:
a. P = D/k = 20/.05 = $400
b. P = 20/.08 = $250
c. P = D1/(k - g) = 20/(.08 - .02) = $333.33
2) If a stock is expected to pay a dividend of $40 for the current year, what is the approximate present value of this stock, given at discount rate of 5% and a dividend growth rate of 3%?
Answer: P = $40/(0.05 - 0.03) = $40/0.02 = $2,000
Topic 2: Supply and Demand
1) Suppose that the demand for oranges increase. Explain the long -run effects of the guiding function of price in this scenario.
Answer: In the long run, the higher price of oranges will signal more firms to enter the orange market, as it will seem more profitable than some other markets. As firms enter, supply increases, causing the price to fall relative to the short-run price and quantity to increase further. The higher short-run price has guided more resources into the market.
2) Suppose that the demand for oranges increases. Carefully explain how the rationing function of price will restore market equilibrium.
Answer: The increase in demand causes a shortage at the original equilibrium price; the quantity supplied is less than the new quantity demanded at that price. The existence of the shortage will cause the price to rise. As price rises, the quantity supplied will increase and the quantity demanded will decrease (along the new demand curve) until equilibrium
Topic 1: The Firm and Its Goals 1) a. If a stock is expected to pay an annual dividend of $20 forever, what is the approximate present value of the stock, given that the discount rate is 5%? b. If a stock is expected to pay an annual dividend of $20 forever, what is the approximate present value of the stock, given that the discount rate is 8%? c. If a stock is expected to pay an annual dividend of $20 this year, what is the approximate present value of the stock, given that the discount rate is 8% and dividends are expected to grow at a rate of 2% per year?
Answer:
a. P = D/k = 20/.05 = $400
b. P = 20/.08 = $250
c. P = D1/(k - g) = 20/(.08 - .02) = $333.33
2) If a stock is expected to pay a dividend of $40 for the current year, what is the approximate present value of this stock, given at discount rate of 5% and a dividend growth rate of 3%?
Answer: P = $40/(0.05 - 0.03) = $40/0.02 = $2,000
Topic 2: Supply and Demand
1) Suppose that the demand for oranges increase. Explain the long -run effects of the guiding function of price in this scenario.
Answer: In the long run, the higher price of oranges will signal more firms to enter the orange market, as it will seem more profitable than some other markets. As firms enter, supply increases, causing the price to fall relative to the short-run price and quantity to increase further. The higher short-run price has guided more resources into the market.
2) Suppose that the demand for oranges increases. Carefully explain how the rationing function of price will restore market equilibrium.
Answer: The increase in demand causes a shortage at the original equilibrium price; the quantity supplied is less than the new quantity demanded at that price. The existence of the shortage will cause the price to rise. As price rises, the quantity supplied will increase and the quantity demanded will decrease (along the new demand curve) until equilibrium