Economics – Coursework Example
21 March Economics Test Answers 6. When interest rates are lowered, existing bond prices rise because they are now offering an above-market rate of interest and sellers require a premium in order to sell the bond. With lower interest rates, some bond issuers will choose to exercise their call option and remove a bond issue from the market, knowing they can release another issue of bonds at a lower rate and reduce the cost of their capital. This reduces supply which raises prices for the remaining bonds with an above-market rate of interest.
7. As interest rates fall, the cost of borrowing capital falls and this is beneficial for companies because the three inputs of a company are labor, management and capital. Lowering the cost of capital means companies can produce a greater profit, all other things being equal. With the expectation of higher profits, demand for stock increases and the price rises in the short term. Supply is static as investors choose not to sell profitable stock shares and companies cannot quickly issue more.
12. The demand for the stock will decrease as the market chooses not to invest in a company that is not meeting earnings expectations. The supply of the stock will increase as current investors choose to sell their shares rather than risk further deterioration of the share price. As supply increases and demand decreases, the new equilibrium point between supply and demand will be at a lower price for the stock.
15a. As the marginal cost of labor rises, the intersection with the demand curve is shifted with the result that there is less demand for labor. A minimum wage law places a floor on wages, effectively eliminating all jobs that would have been offered below that rate of pay.
15b. Labor markets are not perfectly competitive in large part because government regulations create barriers to entry, thus giving firms more market control. The higher the barriers to entry and the lower the profit margin, the more likely monopsonistic conditions will prevail.
15c. An example of monopsonistic hiring is prison industries such as Unicor. Prison industries are immune to collective bargaining on the part of workers and minimum wage laws. Prisoners are required to work in an environment free from competition.(Wagoner)
15d. It is assumed that in a monopsonistic environment, the employer is paying a below-market wage due to lack of competition. If the employer could profitably produce the product and still pay minimum wage, such a law would theoretically have no effect. If the minimum wage caused there to be less demand for the product due to the increase in price, demand for labor would fall.
Wagner, Peter. The Prison Index: Taking The Pulse of the Crime Control Industry. 2003, Web. 21 March, 2011
6. The Federal Reserve has just lowered interest rates. Explain the effect of that on bond prices.
7. In exercise 6, not only bond prices but also stock prices are affected. Explain why.
12. The price of a stock is determined by the demand for and supply of that stock. Both demand and supply depend on investors’ expectations of the future performance-future economic profits-of the firm. Explain what happens to a firm’s stock when the company earns less than investors had expected.
15. Demonstrate how a minimum wage affects the unskilled-labor market. Is the labor market perfectly competitive? Can you find any examples of monopsonistic hiring? What would a minimum wage do in a monopsonistic market?