Author Question: The law of marginal diminishing returns A) is found everywhere. B) is found only in manufacturing. ... (Read 64 times)

ARLKQ · **on:** Jun 30, 2018

The law of marginal diminishing returns
A) is found everywhere.
B) is found only in manufacturing.
C) is found only in developed economies.
D) is the same as the law of diminishing marginal utility.

Question 2

Briefly describe the different conditions which affect the value of a real option.

Jevvish · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

A

Answer to Question 2

Real options are often unique to particular projects, and their strike prices are not always easy to uncover. It gives the holder the right to postpone an investment on the basis of a net present value calculation. The value of the real option varies with the underlying conditions as discussed below.
a) Greater range of outcomes - the greater the range of uncertainty that can be resolved, the higher the value of an option to delay.
b) Higher interest rate - Assume that interest will be 15 percent rather than 10 percent over the future. A higher interest rate indicates a stronger preference for a given payment in the near future relative to the distant future, and the present value of the income stream discounted at 15 percent is less than that of the same stream discounted at 10 percent.
c) Longer delay in resolving uncertainty - The option value model tells us the maximum premium you should pay for the right to resolve the uncertainty in one year rather than two.