Teaching Portfolio
William Caylor
May 23, 2014
Contents
I
II
III
Teaching Statement
2
Financial Economics – ECO 4378
3
Price Theory – ECO 3301
14
1
Part I
Teaching Statement
Economics is the discipline concerned with decision-making under scarcity. I have learned the most from
instructors, and I think I have taught most effectively, when this is kept in view: the focus of instruction
was the desires and incentives of the individual agent. This was, after all, Adam Smith’s starting point.
An imaginative sympathy led him to investigate the intentions and actions of people engaged, as another
economist put it, “in the ordinary business of life.”
Mathematics is an invaluable tool for expressing, systematizing and then testing economic theory. Unfortunately, many students see it as a hurdle, and allow themselves to react in fear and incomprehension, rather
than manipulating the symbols of mathematics to further their understanding. By keeping an eye on the
desires and incentives of individual agents, I hope to keep students engaged with those symbols, so that they
gain facility and move past any earlier fear.
One other challenge in teaching economics is that our students come to us seeking very different things.
Some want to gain skills useful in operating a business, others hope to work as public administrators, some
continue their studies as social scientists and still others hope to study law. Presumably all can gain as
consumers and citizens by looking at markets and public policy through the lens of economics. Teaching
them to understand people as strategic, forward-looking agents, giving them the concepts and habits of
thoughts to understand such actors, will go far towards providing students with what they need and want
from their education in economics.
In the classroom, I hope to convey a sense of wonder at the order which directs the baker, butcher and so
many others to serve the interests of their fellows, and to give students the categories, quantitative skills,
and a view of humans as strategic, forward-looking agents to understand the markets in which they already
live. This understanding will hopefully also help them navigate these markets when they do not function as
we might wish.
2
Part II
Financial Economics – ECO 4378
In the fall of 2012, the instructor usually assigned a section of this course fell seriously ill the weekend before
the first class meeting. As I had been assigned to him as a teaching assistant in past semesters, I was asked
to cover the section for the semester. I adopted his syllabus unchanged, and borrowed material from another
professor’s version of the course, but was not able to access the assignments, tests or lecture notes used in
the past by the originally assigned instructor. Accordingly, I wrote my own assignments, notes and tests
during the course of the semester. I was fortunate to have a small section of prepared and focused students
who were willing to learn with me over the course of the semester.
In the pages following I present the syllabus used, a selection of the quizzes, tests and practice problems I
wrote for the course, and finally end-of-semester course evaluations.
3
Syllabus
Southern Methodist University
Department of Economics
Fall 2012
ECO 4378-001 Financial Economics and Investment Behavior
Class meeting time: MWF from 9:00 – 9:50 a.m.
Class location: Umphrey Lee 242
Instructor: William Caylor
Office: 301CC
Office hours: MW from 11:00 a.m. – 12:30 p.m. and by appointment
E-mail address: [email protected]
Final Exam: Saturday December 8, 11:30 a.m. – 2:30 p.m.
Course description
Trading volume in derivatives has demonstrated explosive growth in the last 35 years. This growth
occurred in part because derivative instruments enabled market participants to reallocate risks
associated with movements in interest rates, exchange rates, stock prices, and commodity prices.
Important theoretical contributions, such as the Black-Scholes option pricing model recognized by
the 1997 Nobel Prize in Economics, along with greatly improved computational capacities, have
sparked the invention of new derivative instruments and sophistication and innovation in the
application of these instruments to risk management problems. A fundamental working knowledge
of derivatives is now a requirement for active participation in today’s global financial markets.
This course will cover the basic types of derivative instruments: forward and futures contracts,
swap contracts and options contracts. In addition, securitization will be covered. The focus will be
on financial derivatives. The objective is to give the student a good understanding of how these
instruments work, how they are priced, and how they are used by market participants. At the
conclusion of this course, the student should be able to price basic types of derivative instruments
and use them to construct hedging strategies.
Course Learning Objectives
Upon successful completion of this course, students will be able to:
1) Demonstrate how securitization and credit-default swaps can be used to manage credit risk.
2) Describe forward and futures contracts, demonstrate how to value them, and explain how to use
them to manage risk.
3) Describe interest rate swap contracts and explain how to use them to manage interest rate risk.
4) Describe options contracts, demonstrate how to value them, and explain how to use them to
manage risk.
5) Discuss the strengths and weaknesses of the risk management tool value at risk.
Required Textbook
The required textbook is Fundamentals of Derivatives Markets by Robert L. McDonald,
Pearson/Addison Wesley, 2009.
This textbook is the undergraduate version of McDonald’s MBA text, Derivatives Markets.
Course Prerequisites
ECO 3301, ECO 4368 or FINA 3320 and one of the following: STAT 2301, 2331 or 4340 or
permission of instructor. A student may not take ECO 4378 if he or she has already completed or is
currently enrolled in FINA 4326.
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Assignments and Assessment
The syllabus I adopted called for three tests during the semester, a final exam and several quizzes. I prepared
ungraded practice problem sets to bridge the gap between problems worked together in lecture and those
required on quizzes and tests in class. For those exams, I used multiple-response questions to check familiarity
with concepts, followed by problems. Snapshots of the first and second exams are enclosed; please use the
links below to access the full documents. I also produced a few handouts, like the one included below on
binomial probabilities, to supplement the lectures where students’ preparation or memory of material from
prior coursework was uneven.
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Quiz 5 Solutions, ECO 4378
Black-Scholes prices for one-month options on
a stock with monthly interest rate 25%, no dividends and volatility of 20%. Deltas are for purchased options.
100 100.2 101 103
105
Strike Call Call delta Put
Put delta Future Spot: 95
95
7.87 0.81
4.37 7.96 8.12
8.78 10.51 12.32
100
4.57 0.61
2.11 4.60 4.73
5.24 6.63
8.16
2.38 0.96 0.96
0.79 0.51
0.33
95
0.94 -0.19
100
2.47 -0.39
5.01 2.50 2.42
2.13 1.53
1.06
1. Suppose the spot price now is 100, and you have sold clients 33 call options with a strike of 95, and 50
put contracts with a strike of 100.
(a) What is your share-equivalent net exposure to the stock?
Solution: Because you have sold the options, the deltas have reversed sign. The calls give 33(−0.81) and
the puts 50(0.39) delta points, for a total exposure of -7.23 shares.
(b) What can you do about it, and what will it cost, assuming you can borrow overnight at
0.25
31
≈ 0.8%?
Solution: We can cover this implicit short position with a purchase of as many shares. This will immediately cost $723, with an interest cost of 0.008(723) = $5.784.
2. What is your mark-to-market profit from this hedge if the spot price tomorrow is 103?
Solution: If tomorrow the price has jumped to 103 per share, the shares, calls and puts will all change in value:
Shares
Calls
Puts
Borrowing
Total:
7.23(103 − 100) =
−33(10.51 − 7.87) =
−50(1.53 − 2.47) =
=
−7.23 × 100 0.25
31
21.69
−87.12
+47
−5.784
$24.214 loss
Because you sold the options, any appreciation in the option reflects a higher expected cost to the writer of the
option at expiration; if you should try to unwind your option position by purchasing 33 calls and 50 puts at this
strike, this makes it more expensive to do so. Similarly, depreciation is beneficial to you the writer.
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Exam 1, ECO 4378
Name:
1. (4 points) Which of the following statements does NOT accurately reflect the relationship between
securities and synthetic forward contracts?
A. Forward = stock – zero coupon bond
B. Zero coupon bond = stock – forward
C. Prepaid forward = forward – zero coupon bond
D. Stock = forward + zero coupon bond
2. (4 points) When purchasing a stock, which arrangement allows for the simultaneous payment of the
stock price in cash and receipt of the actual stock certificate?
A. Forward contract
B. Fully leveraged purchase
C. Outright purchase
D. Prepaid forward contract
3. (4 points) What is not a reason swaps coexist with forward contracts for the same assets?
A. Gains from trade in differential access to markets
B. Persistent arbitrage opportunities
C. Lower transaction costs
D. Reductions in variability of hedged prices
4. (4 points) What distinguishes futures from forward contracts?
A. Futures are exchange-traded
B. Futures are not marked-to-market
C. Futures are more liquid
D. A & C
E. All of the above
5. (4 points) What are the main motives for derivatives trading?
A. Speculation & Hedging
B. Hedging & Market-making
C. Risk aversion and market-making
D. Speculation and Manipulation
E. A & C
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Strike
950
1000
1020
1050
1107
Table 1:
Call
120.405
93.809
84.47
71.802
51.873
Options Prices
Put
Spot Price
51.775
1000
74.201
84.47
Interest Rate
2%
101.214
137.167
7. (10 points) Suppose you hold a share of the stock above, and wish to insure it with a collar using a 950
put and 1050 call. Describe how you would do so, and write down the total profit from the stock and
collar.
8. (10 points) Verify that you can achieve the same payoff with a bull spread using put options, using the
prices above.
Page 2
(a) (10 points) Write down the profit from a straddle using 1020-strike options.
9. Suppose instead you do not own the stock, but wish to gain from any changes in its price, whether up
or down.
(b) (10 points) Write down the profit from a strangle using 1000- and 1050-strike options
(c) (10 points) Comment on which of the above has lower initial cost and which will be more profitable
for a given price change.
Page 3
Review Problems 14 September
Spot Prices
Oil
$/€
Corn
Annual corn storage
Year
1
2
3
90
1.6
3.7
0.5
$ interest
3
3.5
4
€ interest
4
4.3
4.4
1. Find the forward price of oil in years 1, 2 and 3.
Solution: As usual, the forward prices will be Ft = P0 (1 + r)t , or here, 90(1.03) = 92.7, 90(1.035)2 = 96.4102
and 90(1.04)3 = 101.238
2. Find the swap price for oil in years 1 and 2.
Solution: The Swap price will be P such that
P −92.7
1.03
+
P −96.4102
1.0352
+
P −101.238
1.043
= 0, that is,
92.7/1.03 + 96.4102/1.0352 + 101.238/1.043
= 96.657
1/1.03 + 1/1.0352 + 1/1.043
3. Find the forward exchange rate of dollars for euros in years 1, 2 and 3.
Solution: The price of a prepaid currency forward will be the exchange rate divided by the foreign interest
rate, since one could tail the position for that cost if the prepaid forward cost anything different. The forward
x0
price will be the future value of the prepaid forward, or (1 + r)T (1+r
∗ )T . The forward exchange rates will be
2
3
1.04
1.6 1.03
= 1.58462, 1.6 1.035
= 1.57555 and 1.6 1.044
3 = 1.58168
1.04
1.0432
4. Find the three-year currency swap price.
Solution: The currency swap will have
E − 1.58462
E − 1.57555
E − 1.58168
+
+
=0
1.03
1.0352
1.043
so that
E=
1.58462
+ 1.57555
+ 1.58168
1.03
1.0352
1.043
= 1.58065
1/1.03 + 1/1.0352 + 1/1.043
5. Find the forward price of corn in years 1, 2 and 3.
Solution: Because there are storage costs for corn, someone selling a forward contract must be compensated
for
P
storage until delivery. So for storage cost c per period, the forward price will be Ft = P (1 + rt )t + ti=1 c(1 + ri )i .
Concretely, the one-year forward price is
3.7(1.03) + .5(1.03) = 4.326,
the two-year is
3.7(1.035)2 + .5(1.03) + 0.5(1.035)2 = 5.01415
and the three-year forward contract will cost
3.7(1.04)4 + .5(1.03) + 0.5(1.035)2 + 0.5(1.04)3 = 5.94152
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10
A Primer on Binomial Probabilities
William Caylor
ECO 4378
A brief review of binomial probability, as background to binomial
option pricing.1
Probabilities
We call an event which can turn out one of two ways (we can say,
success or failure) a Bernoulli trial. The number of successes or failures in a set of independent and identical Bernoulli trials follows a
binomial distribution.
Coin flips are a relatable case. Take a coin which lands on heads
with probability p, and tails with 1 − p. Then the probability of two
heads in a row is p2 . What about two heads and one tail? This could
happen in three ways, HHT, HTH, or THH, so we must write down
its probability as 3 × p2 (1 − p).
More generally, we can use the “binomial coefficient,” the number
of combinations2 of n trials giving us x successes: C (n, x ) = (nx) =
n!
.
x!(n− x )!
Then the probability of having x successes out of n Bernoulli trials
when the probability of success in each trial is p is
n x
p (1 − p ) n − x .
x
1
This treatment borrows from Casella
and Berger’s Statistical Inference 2nd
ed., 2002 and Bain and Englehardt’s
Introduction to Probability and Math. Stat.,
2nd ed., 1992.
2
These same coefficients may be familiar from Pascal’s triangle; if you expand
out ( x + y)n , the coefficient on x k yn−k
will be (nk).
The expected value or mean number of successes x is just np, and
p
the variance will be np(1 − p), so standard deviation is np(1 − p).
Normal approximation
We can approximate a binomial distribution with a normal distribution with the same mean and variance. Indeed, as n → ∞ the
two converge in probability, as long as p is not too small. For our
purposes this means that the binomial option pricing converges to a
continuous model like that of Black, Scholes and Merton.
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11
Student Evaluations
Student evaluations at SMU are administered electronically, and students must complete them to view the
final grade for the course. In the six numerical items referred to below, students were asked to rate on a
scale from 1 to 4:
1. Instructor’s presentation of course material
2. Instructor’s ability to stimulate interest in the course
3. Relevance of exams and assignments to course material
4. Intellectual challenge of the course
5. Overall evaluation of the instructor’s performance
6. Overall evaluation of the course
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I asked students to give specific feedback in the free-response segment of the evaluations, enclosed below,
knowing this was my first time as instructor of record, and wanting to learn as much from it as I could.
Course Evaluation Essay Response Report
for Caylor,William
[email protected]
Y
FIN ECO AND INVESTMENT BEH
7 General comments:
ECO4378-001-1127Eval
Mr. Caylor did a fine job teaching the class given the circumstances.I appreciate the fact that he gave us review sessions
before the exams which detailed exactly what we needed to know for the tests.In the future, more equations and written
problems would help keep students engaged.Simply having a bunch of text on a powerpoint and reading that text makes
it very difficult for us students to learn especially in a very technical class such as Fin Eco
Very nice professor, extremely helpful and goes out of his way
He really knew the material and would find different ways to convey the material to us to where we would truly understand
it.
Mr. Caylor was incredibly helpful and was always around to answer questions. He often invited us to come to his tutoring
hours for more help. It is great to have a professor that wants you to understand the material and makes sure that he is
around as much as possible. I appreciate him taking on the class on such short notice and rolling with it.
na
Professor had to teach the course without much notice but did a great job! Learned a lot and was quite understanding.
For a grad student who has stepped in to cover Professor Cooley, I think Mr. Caylor has done a marvelous job. He
respects the students and encourages us to ask questions. He responds promptly to our requests and emails. Mr. Caylor
also provides reviews prior to the exams, and highlights the concepts we need to focus on for them, which I find
extremely helpful. The practice problems uploaded on Blackboard are also helpful in aiding me prepare, although I
wished that the working steps could be in greater details. As for the powerpoint slides, typo errors and calculations need
to be corrected and more details could be added to the practice problems, as I sometimes struggled to follow the
workings. Overall, this was a good course, and Mr. Caylor did a good job stimulating my interest in the subject matter.
Page 1 of 1
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Part III
Price Theory – ECO 3301
I was assigned a section of intermediate microeconomics, dubbed “Price Theory” at SMU, in the fall of 2013.
I coordinated the outline of the course schedule and assignments with another graduate student assigned a
section. We chose to use the same book (Pindyck and Rubinfeld) as most other instructors at SMU, but
deviated slightly from its order and presentation of the material. Having reflected on the semester, I believe
I could have tied lecture material more directly to textbook readings; in teaching this course in the future,
I might need to alter the order of presentation to do so. Below I present the syllabus, a selection of quizzes,
problem sets and tests I wrote for the course, a handout amplifying an example from class, an ungraded
practice problem set, and end-of-course evaluations.
One goal I set for myself was to make students aware of the history of major ideas encountered in this course.
Generally, this could not go beyond naming the major contributors to a theory, and giving a sketch of the
timeline and sometimes context of the idea (e.g., Ricardo on the corn laws after the Napoleonic Wars). While
I did not test students on such information, I think it worthwhile to give them some idea of the development
of the content they are expected to assimilate.
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Syllabus
ECO 3301 – Price Theory
TTh 8:00 - 9:20 AM, Room: DH 101
Instructor: William Caylor, [email protected]
Office: ULEE 301-I
Office Hours: TTh 2:00-4:00 and by appointment.
Final Exam: 3:00-6:00 Friday Dec 13, DH 101
Price theory, or intermediate microeconomics, is at the heart of the economics curriculum. We
will examine individual and firm optimizing behavior, their interaction in markets with many and
few participants, and use the tools of game theory to model decision-making in environments with
uncertainty and where agents’ actions are interdependent.
Course Objectives:
1. Students will be able to analyze different theoretical or interpretive perspectives in the study
of economic experiences.
2. Students will be able to evaluate critically the research outcomes and theoretical applications
in economic experiences.
3. Students will understand and perform calculations needed to describe:
Household and firm decision-making, supply and demand
The causes and effects of market structure
Efficiency and failure of markets
Simple games, and their Nash and subgame perfect equilibria
Textbook: Microeconomics by Robert Pindyck and Daniel Rubinfeld, Pearson, 7th or 8th edition.
Prerequisites: ECO 1311, 1312 and MATH 1337 or 1309.
Course Website: The course Blackboard website on courses.smu.edu will be my primary means
of communicating with you outside of class. Assignments, slides, and grades will all be accessible
through it.
Grading: You will earn grades through performance on three tests (including a final exam), three
problem sets and several brief quizzes. Each test will count for 20% of your total grade, each
problem set will count for 7%, and the quizzes together will count for 9% of your grade. There will
be no make-up quizzes. I will drop your lowest two quizzes. The remaining 10% will be assigned
on the basis of attendance and your contributions to class meetings.
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Assignments and Assessment
Quiz 2, ECO 3301
Name:
1. Match the terms with their synonyms or definitions.
decreasing marginal returns
as more input used, marginal product is lower
economic cost
total cost divided by quantity
short run
at least one input is fixed
average cost
extra revenue from one more unit sold
marginal revenue
the lowest price at which fixed costs are covered
marginal cost
explicit and implicit costs
increasing returns to scale
a more-than-proportional increase in output from a change in inputs
accounting cost
change in total cost divided by change in quantity
shut-down condition
explicit costs
$
10
5
Q
2. Label the above cost curves. Graph the profit-maximizing quantity if price is 10. If instead the price is
5, state what the profit-maximizing quantity will be, and why.
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Assignment 2 Solutions, ECO 3301
1. If a firm which has hired l units of labor at 5 each and t units of land at 20 each can produce tl2/3 tons
of grain, find the following.
(a) (5 points) Does the firm enjoy decreasing, increasing, or constant returns to scale? Why?
Solution: To see what returns to scale this production process has, we compare the output from
increasing both inputs by a proportion k to the same factor time the original output. If before
q = tl2/3 , now (kt)(kl)2/3 = k 5/3 tl2/3 = k 5/3 q, which will be greater than kq when the factors have
been increased. This firm has increasing returns to scale.
(b) (5 points) Find the marginal products of land and labor, and verify if there are decreasing marginal
returns.
Solution: Call the production function f (t, l); then the marginal products will be the partial derivatives of f :
∂f
∂l
∂f
∂t
=
2 −1/3
tl
3
=
l2/3
As l increases, the first of these will decrease, so there is a decreasing marginal return to l. The
second is independent of t, so the marginal product of t will either grow nor decrease as the amount
of land used by the firm changes: the firm has a constant marginal return in land for a given amount
of labor. Notice, though that the marginal product of land increases as we increase the amount of
labor used.
(c) (5 points) Using the equimarginal principle, find the firm’s optimal ratio of labor to land.
Solution: We know that at the best combination of land and labor for a given level of production,
the marginal products of land and labor will be in the same proportion as the prices of those factors,
so M Pl /M Pt = 5/20 = 1/4. That is,
(2/3)tl−1/3
1
=
4
l2/3
or,
2t
1
=
3l
4
and therefore the ratio t:l will be 3:8.
2. Suppose a firm has a production function q = k 2/5 l2/5 , the wage is 9 and the rental rate is 16.
(a) (10 points) Write down this firm’s cost-minimization problem. Find the cost-minimizing amounts
of l and k.
Solution: The firm’s cost will be 9l + 16k, with the requirement that the firm’s production be at
least q. Therefore the Lagrangian will be
Λ(k, l) = 10l + 17k − λ(k 2/5 l2/5 − q)
where I subtract the constraint to keep λ positive. The derivatives will then be
∂Λ
∂l
∂Λ
∂k
∂Λ
∂λ
=
=
=
2
9 − λk 2/5 l−3/5 = 0
5
2
16 − λk −3/5 l2/5 = 0
5
q − k 2/5 l2/5 = 0
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Test 3 Solutions, ECO 3301
1. (3 points) Oligopoly has
A. some barriers to entry
B. differentiated goods
C. undifferentiated goods
D. all of the above
E. B & C only
2. (3 points) Monopolistic competition has
A. small barriers to entry
B. differentiated goods
C. undifferentiated goods
D. all of the above
E. A&B only
3. (3 points) The allocative and technical efficiency found in perfectly competitive markets can fail because
of (pick all that apply):
A. asymmetric information
B. market power
C. technical change
D. externalities
E. high unemployment
4. (3 points) A club good is
A. rival & non-excludable
B. non-rival & excludable
C. rival & excludable
D. non-rival & non-excludable
5. (8 points) Match the following terms.
Negative externalities → tragedy of the commons
hidden information → adverse selection
hidden action → moral hazard
positive externalities → free-rider problem
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One-and-a-half Examples of Labor Supply
William Caylor
September 12, 2013
Last class we spent some time on a model with labor sold, as well as a good consumed, by a consumer.
Here’s a rather prettier problem which will get us the same insights, but without needing any fourth roots.
You can use the margins to verify the results.
That example
Suppose we have a consumer who can consume a good c at price p,
and (normalizing time so that l is the fraction of time worked) will
receive a wage w for each unit of time worked. Then the consumer’s
budget will be M ≥ pc − wl. If M = 0, all of the consumer’s income
is wage income. If it is positive, the consumer has some income not
derived from labor.Suppose too that the consumer’s preferences are
given by U (c, l ) = ln(c) − kl . Then we can substitute l = ( M − pc)/w
into this and have ln(c) −
c?
k ( pc− M )
w
with first derivative
1
c
−
kp
w.
Then
= w/kp, so that consumption rises with the wage, falls with the
price of the consumption good, and falls as work becomes less fun
(as k ↑). We can find labor supply by putting c? into the budget, so
that l ? = 1/k − M/w; labor supply will fall with non-wage income,
rise with the wage, and fall with k.
Indifference curves for a “bad”
Indifference curves for two goods are normally downward-sloping,
but labor gives us disutility in this model, and increases our ability
to consume. So, these will slope upward, and curves will represent
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Practice Problems 7 December — Solutions
1. The market demand curve for mineral water is given by P = 15 − Q. If there are two firms producing
mineral water, each with a constant marginal cost of three, fill in the table below. In the monopoly and
Betrand cases, assume an even split of production. In the Stackelberg case, assume firm 1 is the leader.
Model
Shared monopoly
Cournot
Bertrand
Stackelberg
Q1
3
4
6
6
Q2
3
4
6
3
Q1 + Q2
6
8
12
9
P
9
7
3
6
π1
18
16
0
18
π2
18
16
0
9
π1 + π2
36
32
0
27
2. Suppose there are restaurants located at the west and the east end of a factory complex (call them
respectively 0 and 1 in distance). Workers are distributed evenly east-to-west along the complex, and
lose utility of (x − s)2 by traveling from a workstation at x to a restaurant at s. All workers value the
food similarly at V and the restaurants’ fare is identical other than in its location. Call the price charged
by the west end restaurant pW and that charged by the east pE
(a) Write down the utility of a worker located at x from buying food at the west end.
(b) Write down the utility of a worker located at x from buying food at the east end.
(c) If these utilities are equal, find the location of this indifferent worker as a function of pW and pE .
Solution: A worker buying lunch at the west end will get utility V − pW − (x − 0)2 = V − pW − x2 . The
same worker buying lunch in the east will have utility V − pE − (x − 1)2 = V − pE − (1 − x)2 . If the worker
at x is indifferent, then
V − pW − x2 = V − pE − (1 − x)2 ⇒ (1 − x)2 − x2 = pW − pE ⇒ 1 − 2x = pW − pE
1
2
or x = − (pW − pE )/2. So, if prices are equal and there is no difference in the food offered, the worker
just in between the two (x = 1/2) is indifferent.
(d) Use your answer to part (c) to describe what demand each restaurant faces at a given price. (Hint:
if this consumer is indifferent, what action will all consumers nearer one or the other restaurant
take?)
Solution: Demand for the west-end restaurant’s food will be the number of workers between the restaurant
and the indifferent worker x, (x − 0) or simply x. Similarly, demand at the east end will be (1 − x).
3. Consumers can borrow $100 from a card company to make holiday purchases. Some consumers repay
with 95% probability, while others repay with a lower probability of 70%; the card company assumes a
defaulted loan will never be repaid even in part. The card company must make at least a 5% return on
each $100 loan to break even.
(a) If the company can observe which type of borrower each applicant is, what interest rate must they
charge a high-repayment-chance borrower to break even? A low-repayment-chance borrower?
Solution: To break even with a high chance of repayment, the company has to set an interest rate r that
makes 0.05 × 0 + 0.95 × 100(1 + r) = 105; this will be true for r = 0.1052. Similarly, to break even with a low
chance of repayment, it must set a rate that makes 0.3 × 0 + 0.7 × 100(1 + r) = 105, which will be r = 0.5.
(b) If instead, the company is unable to observe a borrower’s type, but knows that high-repayment
chance borrowers are 75% of the population, what single interest rate must the company charge to
break even?
Solution: If the borrower’s repayment probability cannot be observed, the card company only knows that
with 75% probability, a borrower will repay with 95% probability, and with 25% probability, will repay with
only 70% probability. A rate that makes sure the company breaks even will satisfy
0.75 (0.05 × 0 + 0.95 × 100(1 + r)) + 0.25 (0.3 × 0 + 0.7 × 100(1 + r)) = 105.
This will be true for r = 0.1831.
To see more, please click to http://sdrv.ms/18urjmB; to return to the top, please click here.
20
Student Evaluations
In fall of 2013, SMU changed the student evaluation questions. Students were asked to indicate if they
strongly disagreed, disagreed, agreed or stongly agreed with the statements below.
1. The syllabus clearly explained the goals for learning, grading policy, and the schedule.
2. Class time was well-organized.
3. Course materials supported my learning of the course content.
4. Examples and/or particular readings used during class time helped me understand the course content.
5. Assignments including readings, videos, and problem sets, helped clarify my understanding of the course content.
6. Feedback on assignments improved my understanding of the course content.
7. My performance in the class was clearly communicated to me throughout the semester
8. My interest in the subject increased as a result of taking this course.
9. If the class had a discussion component, the instructor encouraged widespread involvement, kept focus, and limited
extraneous comments.
10. The instructor was available to answer questions outside of class.
Students were also asked to rate my performance (11) and the course overall (12) as well below average,
below average, average, above average or well above average, and answered two open-ended questions.
21
FALL 2013
Course ID
Instructor
COURSE STATISTICS
ECO3301-001
Course_Name
PRICE THEORY
Caylor,William
[email protected]
Admin
ECO
RESPONSE SUMMARY
#
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
No. of
4s/%
7
41%
5
29%
4
24%
4
24%
4
24%
6
35%
9
53%
6
35%
4
24%
11
65%
4
24%
3
18%
No. of
3s/%
10
59%
11
65%
7
41%
10
59%
11
65%
6
35%
7
41%
7
41%
11
65%
6
35%
7
41%
7
41%
No. of
2s/%
1
6
2
1
4
1
3
5
7
4
6%
35%
12%
6%
24%
6%
18%
29%
41%
24%
No. of
1s/%
1
1
1
6%
6%
6%
1
6%
1
6%
7
41%
#
Answered
No. of
0s/%
2
12%
6
35%
17
17
17
17
17
17
17
17
17
17
17
17
17
9
9
STNDV
0.51
0.56
0.78
0.79
0.75
0.94
0.62
0.90
1.17
0.49
0.88
0.75
0.78
Enrollment
23
Total 4's
67
30.3%
Course GPA
3.15
Total 3's
100
45.2%
Number Responses
18
Total 2's
34
15.4%
78.3%
Total 1's
12
5.4%
Overall Average
2.93
Total 0's
8
3.6%
Overall Min
0.88
Overall Max
3.65
Total Numeric
221
Overall STD
1.00
Percent Responses
CLASS
AVG
3.41
3.24
2.88
3.00
3.06
3.00
3.47
3.06
2.88
3.65
2.82
2.76
0.88
DEPT
AVG
3.40
3.30
3.25
3.22
3.12
2.88
3.10
3.05
2.69
3.27
3.00
2.88
1.04
Blanks indicate essay
questions.
To see statistics on the evaluations, please click to http://bit.ly/1jDovw2, and to see answers to the
open-ended questions, click to http://bit.ly/1eAnCiB; to return to the top, please click here.
22