1) After the September 11th attacks, one division of the Pentagon began to set up a Policy Analysis Market (PAM), a prediction market for political events in the Middle East. United States senators cancelled the program after discovering that it would allow futures contracts for assassinations and terrorist attacks. Had the PAM survived, how might it have helped the United States government?

a. by showing the world that we did not know very much about events in foreign countries

b. by tipping off terrorists that they were about to be captured

c. by aggregating dispersed information about political events into a single, readable signal

2) On June 30, 2011, the price of 5,000 ounces of silver for December 1, 2013, was about $36 an ounce (or $180,000 for all 5,000 ounces). Suppose Chloe believes that the price of an ounce of silver in December 2013 will be $20. Should Chloe agree to buy or sell silver in a futures contract?

a. She should sell, because $20 is cheaper than $36.

b. She should sell, because it will enable her to make $179,980

c. She should buy, because $20 is cheaper than $36

3) Suppose Chad believes that the price of oil will be higher in the future and buys an oil futures contract from Joe. The contract will give Chad the right to 1,000 barrels of oil at $50 per barrel to be delivered by Joe 30 months in the future. Which statement is correct

a. Chad will receive the cash difference from Joe if the per barrel oil price rises higher than $50 after 30 months.

b. Chad has to pay Joe $50,000 upon the purchase and waits for 30 months for delivery of 1,000 barrels of oil.

c. Joe will receive the cash difference from Chad if the per barrel oil price rises higher than $50 after 30 months.

4) Economist Paul Heyne looked in the newspaper and found that in December of 1991 the price of wheat was $4.05 a bushel. The futures price for March 1992 was $3.87, the May price $3.64, the July price $3.33, September's price was $3.31, and the futures price for the following December was $3.51. What is the implication of these price trends?

a. Speculators were not forecasting increased scarcity of wheat.

b. Selling wheat futures was a pretty bad deal.

c. Buying wheat futures was a pretty bad deal.