Assignment Prompt & Instructions
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You are associated with a corrupt broker in Philadelphia. The broker has paid (bribed) for tomorrow’s orange juice report, which reports on the crop conditions in Florida. The report will be released @ 10 am tomorrow. The market demand and supply curve that exist now, and at the opening of the market, tomorrow, at 9 am are:
a) The equation for the market demand for oj is P = 230 – .5 Q
b) The equation for the market supply for oj is P = 80 + .5 Q.
If the crop is damaged, it will change the slope of the appropriate curve by 1/10 for every 10% of damage: so, for example 30% of damage will change the slope of the appropriate curve from .5 to .8, this is the only effect on the curves.
Your boss has a copy of an erroneous report that says 20% of the crop is damaged, importantly, he does not know this is an erroneous report, he bribed an official for this report, and the official, maliciously gave him erroneous data. He is operating under the assumption that he has the correct report, and only he has it: so he will be either a buyer or seller, at 9 am, believing that only he will be privy to the knowledge that either the demand and/or supply will be moving at 10 am, possibly violently, to a new equilibrium price.
The market opens at 9 am, which will give him time to put his nefarious plan to work: that is, to take advantage of his perceived purloined inside information. The following day, the market opens unchanged (using the equations above at $155, you do not need to derive this) at 9 am (before the report). Will your boss be a buyer or seller? Assume that only your boss’s actions will move the price. AND, that the price that exists just before 10 am, the release of the report, is the result of your boss’s illicit buying (or selling), AND all of your boss’s transactions occur at that price. When the actual report is released at 10 am (ceteris paribus), and your boss has pushed the market to the level he expects due to the fictitious crop report: the market price will return, violently, to its 9 am equilibrium, because the reality is that there is no crop damage, hence no movement of the supply or demand curve. What will happen to your boss’s profit or loss if liquidated immediately?
1 pts on whether this will be profit or loss
5 pts for deciding whether your corrupt boss is a buyer or seller at 9 am. provide a reason and why?
2 pts for your opinion on whether crime pays in this case, provide a reason why.
2 pts for the price your boss will have driven the market down to, or up to (depending on your answer to being a buyer or seller), just prior to the release of the 10 am data.
So in order to solve this problem, you will need to know which curve, demand, supply, both, neither, moves, if at all, as a result of the perceived crop damage. Then, what effect will that have on your boss’s expectations for price…and the result. Good luck.
– 2 years ago