Quiz 2
Econ 308
Managerial Economics
Back of Room (JH 1131 2PM)
Seat
Row
1
2
3
4
1
George,
Amador,
Matthew D Israel
Toscano,
Jason
Proodian,
Arerk
2
Tsirkind,
Dmitriy M
Mazian,
Harry
Montano,
Shylo A
Joumblat,
Jason S
3
Nagbe,
Sompon
Bartamian, Santatikul, Solway,
Abraham K Scott A
Gavin W
4
5
6
Rodriguez, Sapien,
Tanisha R Joseph J
Ramirez,
Jorge I
5
Carroll,
Bryan M
Vu, Nam G
Alvarado,
Christopher
G
Grechanik,
Soto, Onice Hines, Ros Ernest
Geoulla,
Gumushyan
Bryan M
, Grigor
Ho, Tsz Hin
Guerrero,
Elsa L
6
7
8
9
10
Odenthal,
Camacho
Hernandez, Ceja,
Dorothea Iwamoto, ,
Jose E
Alfonso
K
Kosuke Salvador
CorpusAdams, Orjalo, WolcottPineda,
Jahan,
Bridgette Madolore Shulman,
Joshua P Ishrat
L
sB
Ian G
Caraos,
Druar,
Takegawa, Faramarz Street, Patrick
Rosemary A Chiaki
i, David J Joseph B Hans L
Sirisawad
Tamayo,
di,
Oseguera, Johnathan Sawaddi Mailyan,
Manuel
D
bhan
Daniel
Lares,
Paul,
Robert J
Joshua S
Woo, Paul Garcia, Ana San Juan,
S
G
Rosalyn I
Camarena, Butchko,
Jasmin C Allison M
Consider an individual who earns $100,000 today and expects to earn
$120,000 next year.
•Draw his inter-temporal budget constraint if the interest rate is
5%. Compute and label the values for the vertical and horizontal
intercepts and current and future consumption on your budget
line.
•Draw indifference curves if he prefers to consume exactly as
much today as he consumes in the future. Put the amounts of
current and future consumption on the horizontal and vertical
axes.
•Suppose this person lived in Japan and the factory where he
works was swept away by the recent Tsunami. He loses his job
today and expects that next year he will only earn half as much.
Draw his inter-temporal budget constraint.
•Draw indifference curves and indicate how the amount he
borrows or saves changes as a result of the tsunami.
•Suppose the increase in the supply of bonds by firms trying to
rebuild after the tsunami increases the interest rate to 10%.
Starting Income.
Redraw your inter-temporal budget constraint. Draw indifference
curves to show how the person adjusts to the higher interest rate
and indicate on your graph the change in current borrowing or
lending.
Even income:
60,000-X=0 + X/(1+i)
60,000-X= X/1.05
60,000=X+X/1.05
60,000(1.05)=2.05X
X=30,731.707
120K+100K(1.o5)
=225K
Even income:
$120K
120,000-X=100,000 + X/(1+i)
120,000-X=100,000 + X/1.05
20,000=X+X/1.05
20,000(1.05)=2.05X
X=10243.903
$109,756.097
$60K
$29268.292
$29268.292
$100K
100K +1 20K/1.05=$214,285
109,756.097
Consumption today
Consider the two economic models used to explain interest rates from the textbook- the Liquidity Preference Framework and the Theory of
Asset Demand.
1.Use the graphs below and compare and contrast predictions about the change in interest rates due to the Tsunami. Specifically show the
effect of the following:
1.Increased borrowing by firms whose plants were damaged or destroyed by the tsunami.
2.Changes in the borrowing or lending by individuals whose property was destroyed by the tsunami.
3.An increase in the money supply by the Japanese government.
4.The change in income caused by the disruption of economic activity by the Tsunami.
Do both models predict the same change in interest rates, i.e. an increase or a decrease in rates? If the predictions vary explain the reason for
the discrepancy
Reduction in
Wealth/Income
Increased
investment to
replace
destroyed
property.
Increased govt.
deficits
Reduction in
Wealth/Income

A one time increase in the money supply will initiate a chain of events
that will effect interest rates over time as the relative strength of two
effects changes.

A one time increase in the money supply will cause prices to
rise to a permanently higher level by the end of the year. The
interest rate will rise via the increased prices.

Price-level effect remains even after prices have stopped
rising.

A rising price level will raise interest rates because people will
expect inflation to be higher over the course of the year. When
the price level stops rising, expectations of inflation will return
to zero.

Expected-inflation effect persists only as long as the price
level continues to rise.
Question 3





Consider the time path of the price of shares in the Galleon Hedge Fund and the share price of a company about
which Galleon was allegedly receiving inside information around the time an announcement was made that positively
impacted the underlying company’s share price.
Assume that Galleon bought a large number of shares in the underlying company prior to an announcement that
caused share prices to increase.
Also assume that investors had noted that Galleon had a history of “beating the market” by buying shares of
companies whose prices appreciated after positive news was announced and selling shares of companies prior to
announcements that lowered share prices.

 Draw the time path of the market price of Galleon and the price of a company which Galleon allegedly received
inside information about that is consistent with 4 scenarios:
 Galleon having inside information and the company not leaking it prior to the announcement.
 Galleon not having inside information and the company not leaking it prior to the announcement.
 Galleon having inside information and the company leaking the same inside information prior to the
announcement.
 Galleon not having inside information and the company leaking the same inside information prior to the
announcement.
 Suppose that you are the lawyer defending Galleon from insider trading charges. Which time paths can be used
in combination with the Theory of Efficient Markets to defend Galleon? Explain.
 Suppose that you are an investor and are considering investing in Galleon. What time paths would make you
invest in Galleon? Explain.
Question 3.
Price
Galleon1
1. If Galleon had inside knowledge and the
company didn’t leak the price would be bid up
partially prior to the announcement as Galleon
bought company shares.
Company
Stock
If Galleon didn’t have inside knowledge and the
company didn’t leak the information.
Galleon1
Company
Stock
If Galleon had inside knowledge and the
company leaked the information then the price
of Galleon.
Galleon1
Company
Stock
Galleon1
Company
Stock
3 days
before
Announc
ement
Time
If Galleon didn’t have inside knowledge and the
company leaked the information.
Summary Statistics.
Summary Stats
Mean
σ
Count
First
Exam
45
20
41
First Exam
with Quizzes Quiz 1 Quiz 2
57
1.0
5.0
22
1.0
2.0
41
35
41
Grade
Score
σ
Count
%
A
75
1.50
11
27%
B
60
0.75
8
20%
C
40
(0.25)
13
32%
D
35
(0.50)
2
5%
F
0
7
17%
Online Grade Roster
Normali
Points Interest
Aplia:
Exam Score
Normaliz Aplia
zed First
Added to Rate
Aplia What Is
Grade Plus Added Exam Score
Quiz 2 Quiz 1 Part 1 Quiz 1 Part 2 ed Aplia Grad
Exam
First Experim
Total Money? II
Points.
Score
e
Score
Exam
ent
(15)
Alias
Current
Course
Score
Current
Course
Grade
6612105911
1.99
A
2.31
A
91.20
72
19.20
9.20
6
3
1
1.7
A
80
15
1357911130
1.70
A
2.00
A
85.08
67
18.08
3.08
7
4
4
1.4
A
76
13
8184485765
1.44
A
1.69
A
78.87
66
12.87
3.87
5
2
2
1.2
A
73
15
9163167537
1.35
A
2.21
A
89.18
76
13.18
5.18
4
3
1
0.5
B
62
12
8186674397
1.21
B
1.15
B
67.93
54
13.93
3.93
5
2
3
1.3
A
74
15
7604682283
1.19
B
1.79
A
80.84
73
7.84
4.84
3
0.6
B
64
11
1022251867
1.17
B
1.54
A
75.75
60
15.75
4.75
6
2
3
0.8
B
67
13
812302918
1.16
B
1.74
A
79.86
66
13.86
4.86
7
1
1
0.6
B
64
14
6262838454
1.08
B
0.81
B
61.25
46
15.25
6.25
4
2
3
1.4
A
75
13
2025191306
1.08
B
2.63
A
97.62
82
15.62
5.62
6
3
1
(0.5)
C
48
7
8182411990
1.05
B
0.96
B
64.18
55
9.18
5.18
3
1
0
1.1
A
72
14
6263713800
0.94
B
1.48
B
74.67
59
15.67
5.67
5
1
4
0.4
C
61
12
Administrative Details.
Mandatory one week cooling off period.
No discussion of quizzes, exams, or
anything that effects your graded until next
Wed.