Appendix: Winning an auction can be exhilarating, but it can also lead to doubt as to whether you did the right thing or not. This is called:

A price maker is a firm that:

A) has the power to affect the price of the product it sells. B) earns economic profits in both the short run and the long run. C) can sell any quantity of its product at the prevailing market price. D) sells its products at a price equal to the marginal cost of production.

Let: (1 ) Pt be the price of one unit of a market basket of goods (i.e., a composite commodity) in year t; (2 ) Pet + 1 be the expected price of one unit of a market basket of goods in year t + 1; (3 ) ?et + 1 be the expected rate of inflation between period t and t + 1; and (4 ) it be the one-year nominal interest rate. Suppose an individual borrows the equivalent of one unit of a composite

commodity today. Given this information, which of the following expressions represents (i.e., is equal to) the real interest rate (rt)? A) (1 + it)(Pet+1)/(Pt) B) (1 + ?et+1)/(1 + it) C) {(1 + ?et+1)/(1 + it)} - 1 D) {(1 + it)(Pt)/(Pet+1)} - 1 E) none of the above