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Let's say you live in Montana and you like to ride mechanical bulls in bars on Friday nights. You estimate that over the next year there's a 4% probability you will incur medical bills of $20,000, which is equal to your salary as a philosophy professor. Let's assume there's a 96% chance that you won't be injured from flying off the bull over the course of a year. Assume also that your utility depends only on your consumption/income in either possible outcome.
(a) If you buy full insurance (b = D) at an actuarially fair premium (AFP), what would be your resulting income if you're injured?
(b) If you are not injured?
(c) If you buy partial insurance, can your resulting income ever be more when you're injured than when you're not injured?
If your payroll (budget) is increased to $120,000, what should you do to maximize the number of customers served?
The average weekly earnings of bus drivers in a city are $950 with a standard deviation of $45. Assume that we select a random sample of 81 bus drivers.
Assume that the soft coal industry is a competitive industry and it is in long run equilibrium. Now assume that the firms in the industry form a cartel.
Discuss the reason why governments might want to intervene and how they might do- with respect to the following "problem" in the functioning of an otherwise perfectly-competitive ("pareto-efficient") economy:
A study sponsored by the American Medical Association suggests that the absolute value of the own price elasticity for surgical procedures is smaller than that for the own price elasticity for office visits. Explain why this would be expected
Problem on standard deviation
Let the market demand for rye bread be given by Q = 500 + I - 250P rye + 400P wheat , where Q is monthly demand in number of loaves, I is average monthly income in dollars
Consolidated Drugs, Inc. has spent $4 million developing and testing a new anti-aging drug. Management now estimates that it will cost $2 million to produce and market this new product.
Using the Lerner index, find the price elasticity of demand for Botox and interpret what this value means to total revenue if the price of Botox were increased one percentage point.
Suppose a risk-averse consumer has an initial wealth of $5,000 and a utility function U(M) √M.. He faces an 80 percent chance of losing $4000, and a 20 percent chance of losing $0.
Compute the monopoly equilibrium. Compute the consumer surplus. Assume this firm practices two-parts tariffs, Compute the optimal output.
Write down the relationship between savings, capital formation, and consumption.
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