Final answer:
A real option has the highest value with an increase in both volatility and expiration period, as these factors present more profitable outcomes and time for market fluctuations, respectively. A price ceiling or floor, on the other hand, does not shift demand or supply curves but changes market outcomes like creating shortages or surplus by capping prices away from equilibrium.
Step-by-step explanation:
Understanding the Real Option Value
The question asks, "A real option has the highest value with an increase in...options:", providing multiple choice answers. The correct answer is C. both (a) and (b). A real option indeed becomes more valuable with an increase in both, volatility and the expiration period. Volatility adds value to an option because it implies that there are more chances for the underlying asset to swing in prices, potentially leading to more profitable exercise outcomes. A longer expiration period increases the value of a real option as it provides more time for favorable movements in the underlying asset's price.
Price Ceiling's Effect on Markets
Regarding the question about price ceilings, the correct answer is D. neither. A price ceiling mainly causes a change in the market outcome, not a shift in the supply and demand curves. Instead, it sets a maximum price limit on how much can be charged for a product or service. While it does not shift the supply or demand curves, it can create shortages if set below the equilibrium price because at that capped price, quantity demanded will exceed quantity supplied.
Price Floor's Impact
Similarly, for a price floor, the correct answer to the question is D. neither. A price floor, which sets a minimum price above the equilibrium, does not shift the demand or supply curves. It can lead to surplus because at the minimum price, quantity supplied will exceed quantity demanded.