Answer key

 

  1. E
  2. B
  3. B
  4. A
  5. D
  6. D
  7. C
  8. A
  9. A
  10. D
  11. A
  12. B
  13. A
  14. B
  15. A
  16. B
  17. C
  18. A
  19. C
  20. B

 

  1. a. Expected Value Discount Line= 0.3(250,000) + 0.5(222000) + 0.2(140000) = 213000

 

Expected Value Specialty Line= 0.3(400,000) + 0.5(230000) + 0.2(20000) = 239000

b. Variance for Discount line = 1,501,000,000

    Standard deviation = 38,743

 

Variance for Specialty line = 16,809,000,000

    Standard deviation = 129,650

 

The discount store opportunity is far less risky.

 

c. The specialty store offers a higher expected return but not in proportion to the increased risk.

 

  1. a. The probability of receiving $400 is 5/12.  The probability of receiving $100 is 7/12.

Expected payoff = $166.67 + $58.33

                           = $225

 

b. The utility from $400 is square root of 400 = 20.  The utility from $100 is square root of 100 = 10

Expected utility = (20)(5/12) + (10)(7/12) = 14.16

 

            c. Utility from $169 is 13.  The utility from rolling the dice (14.16) is greater than the utility from a certain $169; therefore, Connie will turn down the $169 alternative prize and roll the dice.

 

d. The cash payment that will yield 14.16 is calculated as follows:

14.16 = square root (I)

200.51 = I

 

Connie is indifferent between a cash payment of $200.51 and a roll of the dice.  A payment of $200.52 is preferred to the roll of the dice.

 

  1. You should be able to figure out the answer to this question.

 

  1. a. Q = Qd + Qf

 

Qd - (5 – Pd)/0.005 = 1000 – 200 Pd

Qf – (3 – Pf)/0.00075 = 4000 – 1333.33 Pf

 

Q = 5000 – 15333.33 Pf          0 ≤ Pd ≤ 5

                                                0 ≤ Pf ≤ 3

 

b. Domestic buyers enter market at Pd ≤ 5

    Foreign buyers enter market at Pf ≤ 3

 

c. At P = $2.50 per pound:

            Qd = 1000 – 200(2.5) = 500 pounds a day

            Qf = 4000 – 1333.33(2.5) = 666.68 pounds a day

            Q = 5000 – 1533.33(2.5) = 1166.68 pounds a day

 Check Qd + Qf = Q

 

d. At P = $4 per pound, only domestic buyers enter market; so world demand equation is not appropriate to use.  We must use only domestic demand equation

            Qd = 1000 – 200(4) = 200 pounds a day

 

  1. a. Indifference curves would be vertical if Hamburgers are on the vertical axis

b. Right-angle indifference curves.

c. Straight line downward sloping indifference curves

d. Indifference curve is a circle

 

  1. a. MRS = MUx/MUy = Y/X

b. Optimal mix of X and Y:

            MRS = Px/Py

            Y/X = 9/12 = 0.75

John should consume 0.75 times as much Y as X.

c. John’s current mix is not optimal.  Currently he is consuming 0.67 Y for each X.

 

  1. a. Set Qd = Qs to find Price

1600- 125P = 440 + 165 P

1160 = 290 P

P = 4

 

Q = 1600 – 125(4) = 1100

 

b. For Price Elasticity of Demand = -125 times 4/1100 = -0.45 (approximately)

    For Price Elasticity of Supply = 165 times 4/1100 = 0.60 (approximately)

 

c. Calculate Qd and Qs at the $4.50 price

Qd = 1037.5

Qs = 1182.5

Surplus = Qs – Qd = 1182.5 – 1037.5 = 145 million bushels that government would be forced to buy.

 

 

  1. a. Equate supply and demand to calculate Q

25 – 0.005Q + 0.15(10) = 5 + 0.004Q

21.5 = 0.009Q

Q = 2388.9 units per week

 

At Q = 2388.9, P = $14.56 per unit

 

b. Since we can solve for quantity demanded as a function of prices

 

Q = (25 + 0.15 PY – PX

 

We see that there is a positive relationship between Q and PY.  An increase in price of good Y generates an increase in quantity demanded for good X at any value of PX, which implies that goods X and Y are substitutes.