Question 1: Define benefit and cost externalities. Explain why situations involving benefit externalities tend to result in an underallocation of society’s scarce resources, and why situations involving cost externalities tend to result in an overallocation of society’s scarce resources.
Question 2: The Learned Book Company has a choice of publishing on of two books on the subject of Greek mythology. It expects the sales period for each to be extremely short, and it estimates profit probabilities as follows:
Book A Book B
Probability Profit Probability Profit
0.2 $2,000 0.1 $1,500
0.3 2,300 0.4 1,700
0.3 2,600 0.4 1,900
0.2 2,900 0.1 2,100
Question 3: Calculate the expected profit, standard deviation, and coefficient of variation for each book. If you were asked which of the two to publish, what would be your advice?
Question 4. A U.S importer who owes a Belgian company 500,000 payable 30 days from today expects that the US$ will weaken during this period. What would you advise the importer to do? What would happen if the US$ were to strengthen during this period?