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Jay is an economics professor who's planning his future retirement. He knows that he lives for 2 periods and has $150 thousands in disposable income in period 1 and no wage income in period 2. He has quadratic utility U = 200c - 0.5c^2,where c is measured in thousands, and both ρ = r = 0. He is considering an investment opportunity- to purchase 1 thousand junk grade "C" Greece government debt zero-coupon bonds with a face value of $100 for only $50 each. The bonds mature at their face value in period 2. The problem is that there exists a 40% chance that Greece will default at the end of period 1, and thus he will lose his investment.
1. Should he take that opportunity?
2. For a price of $25 thousand dollars, ING offers Jay to insure his investment, which means that if Greece does default, ING will repay him his initial investment, which is $50 thousand. Should he purchase insurance?
Consider a Cournot duopoly with the inverse demand P= 260-2Q. Firms 1 and 2 compete by simultaneously choosing their quantities. Both firms have constant marginal and average cost MC=AC = 20. Find each firm’s best response function. Find the Cournot-..
Discuss situations involving binding price ceiling and price floor. You can pick your examples from housing industry, health care industry, or from any other industry. Arrange the following four kinds of market on a continuum where one end will have ..
Suppose you compete in a Cournot oligopoly market consisting of 6 firms. The equilibrium market price and quantity are $5 and 10 units, respectively. The marginal cost for each firm is $3. Based on this information we know the price elasticity of dem..
Assume to two firms in an industry with an index of 5,000 announce a merger. The U.S. Justice Department concludes the merger will boost the index to 5,500. The antitrust authorities will most likely.
Wicksteed made a significant contribution to value theory during the marginal utility revolution. This contribution was the "Exhaustion of the product"
AZ approved 98 patients for organ transplants, but those patients have been told they can no longer receive transplants because of budget cuts. The state is facing a $1.5 billion budget deficit and has cut all of their state-funded lung transplants a..
The demand function (inverse) and the marginal cost function of a manufacturing-supply firm are as follows: Write the total revenue function from the inverse demand function shown. Compute total revenue at Q*.
On June 14, 2011, the Delaware Senate approved a gun buyback program. The yearlong program would authorize the state to pay $100 for every gun turned over to police. What sort of guns should Delaware officials expect to get if this plan becomes law?
Jasmine’s Snack Shop sells two brands of potato chips. She produces them by buying them from a wholesale supplier. Brand X costs Jasmine’s $1.00 a bag, and Brand Y costs her $1.40 a bag. Draw Jasmine’s production possibilities frontier if she has $28..
The yield curve is flat at 6% per annum. What is the value of a Forward Rate Agreement where the holder receives interest at the rate of 8% per annum for a six-month period on a principal of $1,000 starting in two years? All rates are compounded semi..
Boss Fuzzhead is an engineer by training and says “I know that we can substitute capital for unskilled labor in the production process that our company uses and projections are that capital costs are declining, so those unskilled folks better just be..
The nation of Upstandia uses kroner for money and its tax code is such that a person making 100,000 kroner per year pays 40,000 kroner per year in income taxes; a person making 200,000 kroner per year pays 70,000 kroner per year in income taxes;
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