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In your job for the private office of a wealthy family, you have to make rational investment decisions. Presently, you are faced with two investment opportunities. The first is an investment project with a sure payoff of 5,200,000. As your second option, you could invest the same amount in a highly risky investment project. If that project goes well, the return would be 12,800,000. However, if it fails, there will be no return whatsoever. According to your estimates, the probability of earning the 12,800,000 is 35 percent only
Explicate what is meant by the term “risk premium”.
The term “risk premium” describes the necessary difference between the expected value of a lottery and the payoff of a sure thing to make a risk averse decision maker indifferent between the lottery and the sure thing. It is the amount by which the payoff of the sure thing must decrease to make the decision maker indifferent between it and the lottery.
Which-one(s) of the following statement(s) is/are correct?
I. According to the theory of comparative advantage, free trade between two countries is mutually beneficial, if each country specialises in the production of those goods where the opportunity cost of producing another unit is only marginally higher than in the other country.
II. According to the theory of comparative advantage, free trade between two countries is mutually beneficial, if each country specialises in the production of those goods where the opportunity cost of producing another unit is lower than in the other country.
III. According to the theory of comparative advantage, free trade between two countries is mutually beneficial only, if at least one country has an absolute advantage in the production of one good.
1. Which of the following statements is true?
Suppose that a consumer has utility function U = .1h + f. Which of the following is true?
A utility function written as U = Axy, where x and y are goods and and are constants represents:
Which of the following does not represent the same preferences as U = xy?
Suppose that the price of good A is $4, the price of good B is $2 and the consumer's
income is $60. Which of the following baskets is not on the consumer's budget line?
At a consumer's interior optimum solution, which of the following will not necessarily
hold true when the consumer can purchase goods x and y?
Identify the statement that is false:
Economists describe consumer choice as a constrained optimization problem. What is the
consumer trying to do?
Which of the following is NOT a characteristic of a perfectly competitive market?
Which of the following statements could be true for a perfectly competitive industry?
A firm's total cost function is: TC = 100 + q. What is the shut-down condition of this
firm?
Each firm in a perfectly competitive industry has the total cost curve: TC(q) = q2 + 100.
The associated marginal cost is MC = $2q. What is the short run firm supply curve for this
industry?
Is the following true or false? "It is not possible for consumers' surplus and producers'
surplus to rise and for a deadweight loss to occur, simultaneously."
Ans: False
Response: Consider the case of a subsidy. In this case, you can see from the diagram that
producers' surplus and consumers' surplus rise, but a deadweight loss is created because
production past the point where the willingness to pay of consumers equals the opportunity
cost of resources. For units between Q* and Q2, the subsidy causes consumers to demand the
product even though their willingness to pay falls below the opportunity cost. [Image:
Fig10001.gif] Another way to think of the problem is the following: while total surplus is
producers' surplus plus consumers' surplus, we must also factor in the cost of the program
that is put in place. Here, the deadweight loss occurs because the government must pay
consumers to purchase past the equilibrium point and this money must come from
somewhere. The deadweight loss occurs because the cost of this program exceeds its benefits
by causing a misallocation of resources towards purchase of this product.
Section: 10.4 Subsidies
When we say that the perfectly competitive market equilibrium is efficient, we mean that:
The equilibrium conditions in a perfectly competitive market where a subsidy, T, is paid
to producers are:
Consider a perfectly competitive market with market supply QS = 5P and QD = 200 - 5P.
What is consumer surplus in this market?
Consider a perfectly competitive market with market supply QS = 10P and market demand
QD = 420 – 60P. What is total surplus in this market?
Which of the following statements is false?
For any particular good, an increase in the price of a complement would most likely
result in?
Consider the following statements:
Statement I: If close substitutes are easily available for a particular good, the price
elasticity of demand for that good cannot be identified.
Statement II: If a relatively large proportion of a person’s income is spent on a
particular good, the price elasticity of demand for that good is most likely
relatively high.
Which of the following is true?
Consider the following statements:
Statement I: If the price elasticity of demand for a good equals -1.25, an increase in
price will result in a decrease in total revenue.
Statement II: If a decrease in price leads to a decrease in total revenue, demand for
the good is price elastic.
Which of the following is true?
When a rent ceiling (maximum price) is imposed below the equilibrium market
price, which of the following is most likely?
Which of the following is least likely regarding indifference curves?
Robert’s MRSxy is given by 2.5. If Good Y is on the y axis and Good X is on the x axis,
the slope of the indifference curve is closest to?
This question addresses the budget constraint: The amount of Good A that a
consumer would have to give up in order to consume 1 more unit of Good B is given
by:
For any particular good, an decrease in the price of a complement would most likely result in?
Consider the following statements:
Statement I: The availability of close substitutes for a particular good A has no effect on the price elasticity of demand for that good A.
Statement II: If a comparatively small proportion of a person’s income is spent on a particular good, the price elasticity of demand for that good is comparatively high (i.e. very elastic).
Which of the following is most likely true?
Consider the following statements:
Statement I: If the price elasticity of demand for a good equals -2.5, an increase in price will result in a decrease in total revenue.
Statement II: If a decrease in price leads to an increase in total revenue, the demand for that good is price elastic.
Which of the following is most likely true?
When a price floor is imposed above the equilibrium market price, which of the following is most likely true?
Which of the following statements is most likely true??
Peter’s MRSxy is given by 1.5. If Good Y is on the y axis and Good X is on the x axis, the slope of the indifference curve is closest to?
This question addresses the budget constraint: The amount of Good A that a consumer would have to give up in order to consume one more unit of Good B is given by:
Which one of the following statements is correct?
If a monopolist faces the inverse demand function P = 50 - 5Q, which of the following statements is true?
I. The equation of the average revenue curve is AR(Q) = 50 – 5Q.
II. The marginal revenue curve is twice as steep as the average revenue curve.
III. For outputs less than 5, marginal revenue is positive, for outputs more than 5, marginal revenue is negative.
Suppose that a monopolist faced demand P = 120 - 4Q and has constant marginal cost MC = 30. If this monopolist engages in first degree price discrimination, total output will equal?
In a “homogeneous goods” duopoly, two firms, Rooler Inc. and AFG are fierce competitors. The market demand is given by P = 200 – 0.9Q1 – 0.9Q2. Q1 denotes Rooler Inc.’s output, and Q2 denotes AFG’s output. The marginal cost of each firm is 17.
a) Given this market demand function, what is Rooler Inc.’s profit-maximising quantity if AFG produces 60 units (in 1,000s)?
Q2 = 60
P = 200 – 0.9Q1 – 0.9 × 60 = 146 – 0.9Q1
The corresponding marginal revenue is:
MR = 146 – 1.8Q1
17 = 146 – 1.8Q1
129 = 1.8Q1
Q1 = 71.67 = 71,667 units
In a “homogeneous goods” duopoly, two firms, Rooler Inc. and AFG are fierce competitors. The market demand is given by P = 200 – 0.9Q1 – 0.9Q2. Q1 denotes Rooler Inc.’s output, and Q2 denotes AFG’s output. The marginal cost of each firm is 17.
Determine Rooler Inc.’s so-called “reaction function”.
P = (200 – 0.9Q2) – 0.9Q1
Therefore:
MR = (200 – 0.9Q2) – 1.8Q1 = 17
183 – 0.9 Q2 = 1.8 Q1
Q1 = 101.67 – 0.5Q2
In a “homogeneous goods” duopoly, two firms, Rooler Inc. and AFG are fierce competitors. The market demand is given by P = 200 – 0.9Q1 – 0.9Q2. Q1 denotes Rooler Inc.’s output, and Q2 denotes AFG’s output. The marginal cost of each firm is 17.
Compute the Cournot equilibrium quantities and price in this market.
Q2 = 101.67 – 0.5Q2
1.5Q2 = 101.67
Q2 = 67.78 = 67,778 units
P = 200 – 0.9 × 67.78 – 0.9 × 67.78
P = 78
Your employer, a pharmaceutical company, has a patent on a specific antibiotic. The inverse demand function for that drug is as follows: P = 800 – 4Q. Marginal cost is constant and equal to 100.
Use the inverse elasticity pricing rule IEPR to determine the profit maximising price and quantity. Clearly indicate your method and approach to the solution.
P = 800 – 4Q
Q = 200 – 0.25P
Therefore:
= – 0.25 x (P/Q) = – 0.25P/(200 – 0.25P )
since Q = 200 – 0.25P we obtain:
(P – 100) / P = -1 / [ – 0.25P/(200 – 0.25P ) ]
P – 100 = (200 – 0.25P ) / 0.25
0.25P – 25 = 200 – 0.25P
0.5P = 225
P = 450
Now we substitute P = 450 into the demand function:
Q = 200 – 0.25P = 200 – 0.25 x 450 = 200 – 112.5
Q = 87.5
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Which of the following statements is false?
