The current price of a stock is $94 & European call options with a strike of $95 currently sell for $4.70. An investor is trying to decide between buying 100 shares of stock and buying 2,000 call options (= 20 option contracts).
A. At what stock price would the investor be indifferent between these 2 trades?
B. At what stock prices would the investor be better off with the option contract purchase?

Answer and Explanation:

The investment in call options may have higher risks which can inturn lead to higher returns especially If the stock price stays at $94.

Hence, an investor who buys call options loses $9,400 while an investor who buys shares will neither gains nor loses anything.

Therfore If the stock price rises to $120, the investor who buys call options gains-

2000* (120 - 95) - 9400 = $40,600

And if the stock price rises to $120, an investor who buys shares gains

100*(120 - 94) = $2600

Which means the strategies are equally profitable if the stock price rises to a level,S, where

100*(S - 94) = 2000*(S - 95) - 9400

S = $100

answer: in the short-run firms will respond by raising the price of turkey.

explanation: initially the long-run equilibrium is at a price of $5 per pound of turkey and a quantity of 50 million pounds per year. now, when webmd claims that a protein found in turkey will increase your expected lifespan by 4 years. the consumers demand for turkey will increase at every price shifting the demand curve to the right from d1 to d2. while, there will be no change in the supply curve in the short-run as it is not possible for producers to adjust supply so quickly. as a result the new equilibrium will occur at a higher price and a higher quantity of turkey.

thus, in the short run firms will respond by increasing the price of turkey, selling more quantity at a higher price and earning economic profits.