Ans.

to Problems in Chapter 4

Solution to Problem no. 1 (pg.85):

Probability Required Price Prob  Price Prob  (Price  Exp. Price)2

Yield
0.1 6.60% $774.41 $ 77.44 12.84776241

0.2 6.75% $770.07 $154.01 9.775668131

0.4 7.00% $762.90 $305.16 0.013017512

0.2 7.20% $757.22 $151.44 6.862609541

0.1 7.45% $750.02 $ 75.02 16.5903224

$763.07 46.08937999

The expected price is $763.07.

The variance is $46.09, or a standard deviation of $6.79.

1
 Solution to Problem no. 3 (pg.85) : First, translate the interest rates into prices.
1000  P
i  11.8%  , or P  894.454
P
1000  P
i  12.2%  , or P  891.266
P
We know two points on the demand curve:
P  891.266, Q  275
P  894.454, Q  250

 P 891.266  894.454
So, the slope    0.12755
Q 275  250
Using the point-slope form of the line, Price  0.12755  Quantity  Constant. We
can substitute in either point to determine the constant. Let’s use the first point:
891.266  0.12755  275 + Constant, or Constant  856.189
Finally, we have:
Bd : Price  0.12755  Quantity  856.189

Solution to problem no. 4 (pg.86):

a. Solve the equations simultaneously:

2
P Q  940
5
[P  Q  500]
7
0 Q  440, or Q  314.2857
5
d s
Plug Q = 314.2857 into any one of the two equations for B and B to solve for ‘P’
This implies that P  814.2857.

1000  814.2857
b. i  22.8%
814.2857

2
Solution to problem no. 5 (pg.86):

The new demand equation after the parallel shift is as follows:

2
Bd : Price  Quantity  990
5
Now, solve the equations simultaneously:
2
P Q  990
5
[P  Q  500]
7
0 Q  490, or Q  350.00
5
This implies that P  850.00.
1000  850.00
i  17.65%
850.00

3
Solution to problem no. 6 (pg. 86): Prior to the change in inflation, the equilibrium was
Q  350.00 and P  850.00. The new equilibrium price can be found as follows:
1000  P
i  19.65%  , or P  835.771 .
P
This point (350, 835.771) will be common to both equations. Further since the shift
was a parallel shift, the slope of the equations remains unchanged. So, we use the
equilibrium point and the slope to solve for the constant in each equation:
2
B d: 835.771  350  constant, or constant  975.771
5
2
B d: Price  Quantity  975.771
5
and
B s: 835.771  350  constant, or constant  485.771
B s: Price  Quantity  485.771