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Suppose the government enacts a tax that requires each active firm in market to pay an annual fee of F dollars. What effect will this tax have in the short run?
Does either player have a dominant, weakly dominated or dominated strategy? Identify all the Nash equilibria. Are all equally plausible? Why or why not?
What is the net expected payoff from each project? Which is better for Jeffrey, and by how much? How much will Jeffrey pay for the information?
Why might it make sense for the same riskaverse person to both eliminate risk by purchasing insurance and take on new risk by investing in the stock market?
nitially, Maria consumes 400 kg of food when it's sunny and 75 kg of food. How much insurance will she buy, and how much food will she consume?
Show that the degree of risk aversion does affect the value of insurance. Is the value of fair insurance smaller or larger to a more risk-averse consumer?
Compute her expected payoff, her expected utility, the certainty equivalent of her risky consumption bundle, and the risk premium.
Explain why this statement is true. Assuming there are only two possible outcomes, illustrate with a graph.
Suppose that consumption when it's sunny and consumption when there's hurricane are perfect complement. Explain why the assumption imply infinite risk aversion.
List as many types of financial risk as possible for each of following activities: driving a car; going to college; trying out a new brand of breakfast cereal.
Based on your estimates, compute the PDV and the IRR of your investment in human capital.
Knowing only that Janet is more patient than Michael would you say she is more likely to undertake the project than Michael?
Explain intuitively why project A must be better than project B at higher interest rates as well.
Calculate the yield to maturity for each the bonds. A20-year bond with a coupon of $100, principle payment at maturity of $2,000, and a current price of $2,000.
The net cash flows from an investment are -X dollars in the first year, positive Y dollars in year T, and zero in all other years. Write a formula for the NPV.
What will the trustee do if the trustor invests $2, $4, $6, $8, or $10? What is the trustor's payoff in each case? What is the trustor's best choice?
Describe three situations in which people use rules of thumb to make complex decisions. What rules do they tend to use? Do those rules strike you as reasonable?
Why do you think the effect is so strong with regard to organ donation? Can you reconcile this pattern with standard economic theory?
Based on the material in this chapter, what patterns do you think you should watch out for? Why? How would you detect them?
What are the characteristics of a good economic experiment? What characteristics make an experiment convincing?
Do you agree with the prediction that they'll be unable to cooperate? If not, how and why might they be able to sustain cooperation?
Suppose Wesley and Vizzini play the Battle of Wits according to the following rule. Illustrate this game by drawing a tree and solve it by reasoning in reverse.
Draw a table representing the given game, showing the players' strategies and payoffs. Are there any dominant, weakly dominated or dominated strategies?
Draw a table showing the two players' strategies and payoffs. Are any strategies dominant, weakly dominated, or dominated?
Draw a table representing this one-stage game, showing the players' strategies and payoffs. Does either company have a dominated strategy?