Question

(a) What impact will a producer – producer rivalry have on a good’s prices (increase or decrease)? Please explain (b) What impact will a consumer – consumer rivalry have on a good’s prices (increase or decrease)? Please explain. (c) A bond pays $100 at the end of each year for five years, plus an additional $1,000 when the bond matures at the end of five years. What is the present value of all the future payments if your opportunity cost of funds (interest rate) is 6 percent? Please show your calculations. (You get one payment of $100 one year from now, $100 two years from now, $100 three years from now, $100 our years from now, and 5 years from now in the last year you get the final $100 payment and an additional $1,000 payment).

Answer 1

A.

A rivalry between the producers, will lead to the decrease in price of goods, because there will be price war between the producers. It will make producers to sell their goods at lower price to attract the price. So, price of goods will decrease.

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B.

Consumer - consumer rivalry is going to increase the price, because more consumers are chasing the same goods and it creates opportunities for the seller to increase the price. It is due to the reason that more money starts chasing few goods.

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C.

Time = 5 year

Annual payment = $100

Payment at the end of 5 year = $1000

R = 6%

So,

Present value of all these payments = 100*(1-1/(1+6%)^5)/.06 + 1000/1.06^5

Present value of all these payments = $1168.49 or $1168

Hence, Present value of all these payments is $1168.49 or $1168