1. Suppose you are a consultant to a firm that has tw...
Suppose you are a consultant to a firm that has two production facilities (A and B), both of which produce the same product. An accountant provides you with the following cost data:
QA=40,000 QB=30,000
TCA=$900,000 TCB=$570,000
ATCA=$22.50 ATCB=$19.00
MCA=$8.00 MCB=$12.00
Given these data, how, if at all, would you recommend reallocating production between these two plants? Briefly explain why.
2. Question: Darrell has a utility function for daily income gi...
Darrell has a utility function for daily income given by u(I) = 10* I . Thus, an income of $36 a day would give Darrell a utility of u($36) = 10* 36 = 10*6 = 60.
Darrell has a job that pays him $100 a day. Darrell goes snowboarding on weekends, so with probability 10% (p = 0.10) Darrell has an accident that results in him breaking his leg and unable to work.
What is the actuarially fair price of an insurance policy that will pay Darrell $100 a day if he injures himself snowboarding and is unable to work (just think of this policy paying Darrell for a single day of missed work to simplify calculations)? What is Darrell’s expected utility for a given day in the case that he doesn’t have insurance (think of what he expects his utility to be on Monday when he leaves work on Friday)?
Would Darrell be willing to buy the insurance policy in part (a) at the actuarially fair price you calculated? Would Darrell be willing to pay more than this actuarially fair price? If so, what is the most that Darrell would pay for such a policy? What does this tell you about Darrell’s risk premium given his preferences? Is he risk averse?
Now consider Tommy who also likes to snowboard but is much more reckless and makes more money than Darrell. Tommy has the same utility function as Darrell, but has a daily income of $225. Tommy will break his leg with probability 60% (so p = 0.6) and be fine for work on Monday only 40% of the time. What is an actuarially fair price of insurance for Tommy that will pay him $225 per day in the event of an accident? What is his expected income without insurance? Calculate the risk premium that Tommy would be willing to pay for insurance given this scenario. How does his risk premium compare to Darrell’s?
3. When the investment rate in a country decreases permanently (as a result of discouraging fiscal policy such as an increase in investment taxes, for example), does it impact the level or the growth rate of output per worker? Explain briefly what happens in the short run and in the long run.
4. Mike is a beachcomber who gathers and sells clams to local fish markets in Cape Cod. Suppose Mike sells Fred's Fish Market a basket of clams for $8 on 12/30/12. Fred's Fish Market cleans the clams, ensures they meet food safety standards, and sells them to Cod's Restaurant for $12 on 12/31/12. Cod's cooks the clams and sells them to Sally for $17 on 01/01/13.
A) Calculate the total value added by Cod's restaurant and enter it.
B) Using the value-added approach determine the impact the basket of clams has on GDP in 2012. Enter your calculation below.
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5. Sometimes goods are rationed, so people cannot buy as much as they want at the announced price. A good example is Superbowl tickets, which are sold at below market price. Suppose that a consumer has the following Cobb-Douglas utility function
U(X1X2) =X10.2X20.8
(a) Find the marshallian demand for the 2 goods given p1=2, p2=2 and 1=200.
(b) Now assume that the consumer can only buy 10 units of X1. What is the demand for good 2 is the supply for good 1 can be rationed at 10 units per customer?
(c) What is the MRS at the new rationed equilibrium?
(d) Supposed that a black market opens up in good 1. How much would the consumer pay for one more unit of good 1?