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Q1. Suppose an investment can yield three possible cash flows with their probabilities given in the parentheses: $600(p=0.5); $-100 (p=0.2) and $800 (p=0.3). a) Compute the expected value and the standard deviation of this investment. Is this investment risky? Why? b) The equation E(x)=359 + 0.5SD describes the indifference curve of this investor. Is this investor risk averse, risk neutral, or risk loving? Explain your answer and draw the curve. c) How much would this person pay for the investment opportunity (certainty equivalent of the current investment)? How much is risk premium for the current investment? Q2. Patrick consumes only two goods: Celtic Music concerts and Celtic Springs Water. Patrick earns $100 per month at his part-time job in the library. The price of Celtic concerts is $10. The price of Celtic Springs Water is $2. Patrick currently goes to 5 Celtic concerts and consumes 25 bottles of Celtic Spring Water in a month. (a) Draw Patrick''s budget constraint and optimal consumption bundle. Please put Celtic concerts on the x-axis. (b) In April Patrick receives a 5% pay increase. Meanwhile the inflation raises the price of concerts to $10.50 and the price of Celtic Springs Water to $2.10. Draw Patrick''s new budget constraint and optimal consumption bundle. Please put Celtic concerts on the x-axis. How many Celtic concerts does he attend in April? How many bottles of water does he drink in April?
to the permanent income hypothesis, households will tend to react to a temporary tax cut by assuming the new tax level will be permanent.
The current market price is $7.50. At her profit-maximizing level of production, the average variable cost is $8.00, and the average total cost is $8.25. Mrs. Smith should.
Determine how a policy will change social welfare, changes in individual utility for high-income individuals are weighted more heavily.
The widget industry in Springfield is competitive, with numerous buyers and sellers. Consumers don't differentiate among the various brands of widgets (no product differentiation). The industry demand curve is given by: Qd = 998 - 5Pw + 4 Y - 6Pg
Despite the empirical evidence to the contrary, college decision-makers often believe that their price elasticity of demand is essentially zero. Is that right How important were price considerations in making your college decision Would a change o..
Determine the quantity demanded, the quantity supplied, and the magnitude of the surplus if a price floor of $42 is imposed in this market.
The market represented in exhibit above is allowed to operate freely, find the total employment in the market and total employment by the firm
In many developing nations, young women have lower enrollment rates in secondary school than do young men. Describe several ways in which greater eductional oppotunities for young women could lead to faster economic growth in these countries
if Q = 60 − (1/2)P, and MC = 60, which means that MR = 60 how do you work out the price, which then allows you to work out the Q
If Advanta believes raising fees is a profitable move, then why would it delay implementing the higher fees, which could reduce the amount of profit generated by higher fees?
Dependency” theorists believe that moving surplus labor from agriculture to industry where that labor will earn profits that can be reinvested for further growth is the key.
Define asymmetric information. Distinquish between hidden characteristics and hidden actions. Which type of asymmetric information contributes to the principal agent problem?
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