Asked by Ninh Thi Thuy Trang on Apr 28, 2024
Verified
A market maker faces the following demand and supply for widgets.Eleven buyers are willing to buy at the following prices: $15,$14,$13,$12,$11,$10,$9,$8,$7,$6,$5.Eleven sellers are also willing to sell at the same prices.If the market maker decides to only make one transaction what is his profit/bid-ask margin
A) $8
B) $10
C) $12
D) $16
Profit
is the financial gain realized when the amount earned from a business activity exceeds the expenses, costs, and taxes involved in sustaining the activity.
Bid-ask Margin
The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask), indicative of market liquidity.
Market Maker
An entity that buys and sells securities from their own inventory, ensuring liquidity and trading activity in financial markets.
- Compute the difference between buying and selling prices as well as the earnings of market makers across different trading circumstances.
Verified Answer
ZK
Zybrea KnightMay 02, 2024
Final Answer :
B
Explanation :
The market maker should choose the highest bid and lowest ask prices to maximize profit or the bid-ask margin. In this case, the highest bid price is $15, and the lowest ask price is $5. The bid-ask margin would be the difference between the bid and ask prices, which in this case is $15 - $5 = $10. Therefore, the answer is (B) $10.
Learning Objectives
- Compute the difference between buying and selling prices as well as the earnings of market makers across different trading circumstances.