Question

Question 16 2 pts A public good: is characterized by non-rivalry and non-excludability is available to all and cannot be denied to anyone. can not be produced profitably by private firms. all of the above. Question 17 2 pts A credit default swap can best be described as: O a bond backed by the value of an underlying bundle of mortgages O a type of insurance contract against the default of bonds and mortgage backed securities. the option to purchase shares in a corporation at a pre determined price O an instrument of the devil 2 pts Question 18 Limited liability means that:

16 and 17

Answer 1

Question 16

The correct answer is (d) all of the above

CHARACTERISTICS OF PUBLIC GOOD

• Non-excludability – once supplied, potential users or consumers cannot be preventing deriving a benefit
• Non-rivalry – once supplied, individuals do not need to compete with each other, given that it become ‘freely available’ once it is produced
• Non-diminishability – when one consumer uses the good the stock available to others does not diminish
• Non-rejectability – once a public good is supplied it cannot be rejected by beneficiaries
• Producers cannot charge at the point of consumption, and could not, therefore, generate any revenue or profit

Question 17

The correct answer is (b) a type of insurance contract against the default of bonds and mortgage backed securities.

CREDIT DEFAULT SWAP (CDS)

A credit default swap is a financial derivative that guarantees against bond risk. Swaps work like insurance policies. They allow purchasers to buy protection against an unlikely but devastating event. Like an insurance policy, the buyer makes periodic payments to the seller. Credit default swaps may be used for emerging market bonds, mortgage-backed securities, corporate bonds and local government bond.