Let P be the price of a good and let I represent consumer income. Which of the following demand functions represents a luxury good with inelastic price response?
A) log(Q) = 4 2 log(P) + 2 log(I)
B) log(Q) = 4 - 0.5 log(P) + 0.25 log(I)
C) log(Q) = 4 - 0.25 log(P) + 2 log(I)
D) log(Q) = 4 + 2 log(P) + 0.2 log(I)
Question 2
Firms that issue callable bonds have the option of repaying the principal to the bond buyers before the stated maturity date for the bonds. Firms may call their bonds before maturity in order to avoid making some of the coupon payments.
Should we expect the price of a callable bond to be higher or lower than the price of a non-callable bond that has the same coupon payment, principal, and effective yield? A) Price of the callable bond should be higher
B) Price of the bonds should be the same
C) Price of the callable bond should be lower
D) We need to know the year in which the bond is called in order to compare the prices
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