Question 1 of 2

Work It Out

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You must read each slide, and complete any questions on the slide, in sequence.

Two major-party presidential candidates are running against each other in the 2016 election. The Democratic Party candidate promises more money for corn-based ethanol research, and the Republican Party candidate promises more money for defense contractors. In the weeks before the election, defense stocks take a nosedive.

The candidate will probably win the election.

Correct! If the pro-defense candidate was expected to win, defense stocks would rise, not fall, due to the expectation that defense contractors would receive more money. Since defense stocks have fallen, the pro corn-based ethanol candidate (i.e., the Democratic Party) must be expected to win.

Sorry! Consider what would happen in the defense industry if the pro-defense candidate won, and then what would happen if the pro corn-based ethanol candidate won. To review signaling, please see the section “Signal Watching.”

We talked about how price signals are sometimes noisy. Which of the following markets might you want to look at to see if your answer to Question 1 is correct?

i. automobile market
ii. real estate market
iii. natural gas market
iv. commodities market

ii, iii, and iv

i, ii, and iv

i, ii, iii, and iv

i, ii, and iii

3:30

WIO_Cowen_Chapter07_01

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Question 1 of 2

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