#1
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Need help with a graph: max (x-F,0)
Hi,
I haven't dealt with max and min graphs in probabley about 4 years. This is an application of the debt versus equity topic. Suppose a firm's business activities generate a random income of $x. Suppose a firm funds its activities by selling one each of two sorts of claims (or securities). An investor who buys the first type earns an income (or return) of: min(x; F) An investor who buys the second gets a return of: max(x - F; 0) Here, x is random, meaning that it is sometimes small and sometimes large and F is fixed, does not vary. In the exercise, suppose F=$500. a)(5p) Draw a graph of the return that an investor gets for each claim. Put the random income x on the x axis and the investor's return on the y axis. Now our teacher drew the min graph..it slopes upward at a 45 degree angle from the origin to the point (500,500) where it levels out. I would appreciate any help. Thanks, Donny |
#2
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Re: Need help with a graph: max (x-F,0)
Consider 2 cases:
1) x<500 In this case min(x,500) always equals x, so you simply draw the line y=x on this interval 2) x>=500 In this case min(x,500) always equals 500 so you just draw the line y=500 which is horizontal. |
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