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Economics
In Solved Problem 16.3, what is Jen's risk premium if her utility function were ln(W)?
Mary's utility function is U(W) = W0.33, where W is wealth. Is she risk averse? Mary has an initial wealth of $27,000. How much of a risk premium would she require to participate in a gamble that has
Lori, who is risk averse, has two pieces of jewelry, each worth $1,000. She plans to send them to her sister's firm in Thailand to be sold there. She is concerned about the safety of shipping them.
Helen, the owner of Dubrow Labs, worries about the firm being sued for botched results from blood tests. If it isn't sued, the firm expects to earn a profit of 100, but if it is successfully sued,
Jill possesses $160,000 worth of valuables. She faces a 0.2 probability of a burglary, where she would lose jewelry worth $70,000. She can buy an insurance policy for $15,000 that would fully
What are the major differences between expected utility theory and prospect theory?
Draw an individual's utility curve to illustrate that the person is risk-averse with respect to a loss but is risk-preferring with respect to a gain?
Is someone who acts as described in prospect theory always more likely or less likely to take a gamble than someone who acts as described by expected utility theory? Why? Are there conditions (such
Using information in the Challenge Solution, show how to calculate the price of fair insurance if the probability of being in a crash were as high as the frequency in 2001, 0.00000077? Use a graph to
Other sports teams benefit financially from playing a team with a superstar whom fans want to see. Do such positive externalities lower social welfare? If not, why not? If so, what could the teams do
According to the digital media company Captivate Network, employees viewing the 2012 Olympics instead of working caused a $1.38 billion loss in productivity for U.S. companies. Is this productivity
In Figure 17.1, explain why area D + E + H is the externality cost difference between the social optimum and the private equilibrium?Figure 17.1: Welfare Effects of Pollution in a Competitive Market
Applying the model in Exercise 2.3, use calculus to determine the optimal level of H?
Australia required that incandescent light bulbs be phased out by 2010 in favor of the more fuel-efficient compact fluorescent bulbs. Ireland's ban started in 2009, and the United States started
Suppose that the government knows the marginal cost, MC, curve of reducing pollution but is uncertain about the marginal benefit, MB, curve. With equal probability, the government faces a relatively
Markowitz (2012) found that limiting the number of liquor stores reduces crime. To maximize welfare taking into account the harms associated with alcohol sales, how should a regulatory agency set the
In 1998, the National Highway Traffic Safety Administration distributed the film Without Helmet Laws, We All Pay the Price. Two reasons for this title are that some injured motorcyclists are treated
In Figure 17.1, could the government use a price ceiling or a price floor to achieve the optimal level of production?Figure 17.5: Monopoly, Competition, and Social Optimum with Pollution
In Figure 17.3, the government may optimally regulate the paper market by taxing output. Given that the output tax remains constant, what are the welfare implications of a technological change that
Suppose that the inverse demand curve for paper is ( = 200 - Q, the private marginal cost (unregulated competitive market supply) is MC( = 80 + Q, and the marginal harm from gunk is MCg = Q. a. What
Connecticut announced that commercial fleet operators would get a tax break if they converted vehicles from ozone-producing gasoline to what the state said were cleaner fuels such as natural gas and
If global warming occurs, output of three of the major U.S. cash crops could decline by as much as 80% according to Roberts and Schenkler (2010). Crop yields increase on days when the temperature
In the following, use the model in Exercise 3.7. Refer to Exercise 3.7, Suppose that the inverse demand curve for paper is ( = 200 - Q, the private marginal cost (unregulated competitive market
List three specific examples where Coasian bargaining may result in the social optimum?
Analyze the following statement. Is garbage a positive or a negative externality? Why is a market solution practical here? Since the turn of the twentieth century, hog farmers in New Jersey fed
To the dismay of business travelers, airlines discretely cater to families with young children who fly first class (Rosman, Katherine, "Frequent Criers," Wall Street Journal, May 20, 2005, W1).
List three examples of goods that do not fit neatly into the categories in Table 17.3 because they are not strictly rivalrous or exclusive?Table 17.3: Rivalry and Exclusion
Guards patrolling a mall protect the mall's two stores. The electronics store's demand curve for guards is greater at all prices than that of the ice cream parlor. The marginal cost of a guard is $10
Two tenants of a mall are protected by the guard service, q. The number of guards per hour demanded by the electronics store is q1 = a1 + b1(, where p is the price of one hour of guard services. The
In the analysis of the optimal level of a public good, suppose that each person's utility function is quasilinear: Ui(G) + Pi. Show that the optimal G is unique and independent of P1 and P2 if
Anna and Bess are assigned to write a joint paper within a 24-hour period about the Pareto optimal provision of public goods. Let A denote the number of hours that Anna contributes to the project and
Are broadcast TV and cable TV public goods? Is exclusion possible? If either is a public good, why is it privately provided?
To prevent overfishing, could one set a tax on fish or on boats? Explain and illustrate with a graph.
There are 240 automobile drivers per minute who are considering using the E-ZPass lanes of the Interstate 78 toll bridge over the Delaware River that connects Easton, Pennsylvania, and Phillipsburg,
Vaccinations help protect the unvaccinated from disease. Boulier et al. (2007) find that the marginal externality effect can be greater than one case of illness prevented among the unvaccinated. Is
Redraw panel b of the Challenge Solution figure to show that it is possible for trade to increase welfare even when pollution is not taxed or otherwise regulated?
In the Challenge Solution, where there is no pollution as in panel a of the figure, how do we know that winners from trade can compensate losers and still have enough left over to benefit themselves?
While self-employed workers have the option to purchase private health insurance, many-especially younger-workers do not, due to adverse selection. Suppose that half the population is healthy and the
Some states prohibit insurance companies from using car owners' home addresses to set auto insurance rates. Why do insurance companies use home addresses? What are the efficiency and equity
According to Edelman (2011), the widely used online "trust" authorities issue certifications without adequate verification, giving rise to adverse selection. Edelman finds that TRUSTe certified sites
Suppose that the buyers in Exercise 3.3 incur a transaction cost of $200 to purchase a car. This transaction cost is the value of their time to find a car. What is the equilibrium? Is it possible
Suppose that everyone in the used-car example in the text is risk neutral, potential car buyers value lemons at $2,000 and good used cars at $10,000, the reservation price of lemon owners is $1,500,
Many wineries in the Napa Valley region of California enjoy strong reputations for producing high quality wines and want to protect those reputations. Fred T. Franzia, the owner of Bronco Wine Co.,
In Solved Problem 18.3, if the vast majority of all consumers knows the true prices at all stores and only a few shoppers have to incur a search cost to learn the prices, would the equilibrium be
Sometimes a firm sells the same product under two brand names. For example, the Chevy Tahoe and the GMC Yukon are virtually twins (although the Yukon sells for $490 more than the Tahoe). Give an
In the education signaling model, suppose that firms can pay c* to have a worker's ability determined by a test. Does it pay for a firm to make this expenditure?
Some universities do not give letter grades. One rationale is that eliminating the letter-grade system reduces pressure on students, thus enabling them to learn more. Does this policy help or hurt
Some firms are willing to hire only high school graduates. Based on past experience or statistical evidence, these companies believe that, on average, high school graduates perform better than
Suppose that you are given wh, wl, and in the education signaling model. For what value of c are both a pooling equilibrium and a separating equilibrium possible? For what value of c are both types
Education is a continuous variable, where eh is the years of schooling of a high-ability worker and el is the years of schooling of a low-ability worker. The cost per period of education for these
In Exercise 5.5, under what conditions is a pooling equilibrium possible?
In Exercises 5.5 and 5.6, describe the equilibrium if cl ( ch?
When is statistical discrimination privately inefficient? When is it socially inefficient? Does it always harm members of the discriminated-against group? Explain.
A flyer from one of the world's largest brokers says, "Most personal investment managers base their fees on a percentage of assets managed. We believe this is in your best interest because your
A study by Jean Mitchell found that urologists in group practices that profit from tests for prostate cancer order more of them than doctors who send samples to independent laboratories. Doctors'
When I was in graduate school, I shared an apartment with a fellow who was madly in love with a woman who lived in another city. They agreed to split the costs of their long-distance phone calls
Book retailers can return unsold copies to publishers. Effectively, retailers pay for the books they order only after they sell them. Dowell's Books believes that it will sell, with ½ probability
In Solved Problem 19.1, does joint profit increase, decrease, or remain the same as the share of revenue going to Arthur increases?
In the duck-carving example with full information (summarized in the second column of Table 19.1), is a contract efficient if it requires Paula to give Arthur a fixed-fee salary of $168 and leaves
In the duck-carving example with limited information (summarized in the third and fourth columns of Table 19.1), is a fixed-fee contract efficient? If so, why? If not, are there additional steps that
The author of a science fiction novel is paid a royalty of β share of the revenue from sales, where the revenue is R = (q, p is the competitive market price for novels, and q is the number of copies
Suppose now that the publisher in Exercise 2.6 faces a downward-sloping demand curve. The revenue is R(Q), and the publisher's cost of printing and distributing the book is C(Q). Compare the
John manages Rachel's used CD music store. To provide John with the incentive to sell CDs, Rachel offers him 50% of the store's profit. John has the opportunity to misrepresent sales by fraudulently
In the National Basketball Association (NBA), the owners share revenue but not costs. Suppose that one team, the L.A. Clippers, sells only general admission seats to a home game with the visiting
Traditionally, doctors have been paid on a fee-forservice basis. Now doctors are increasingly paid on a capitated basis: They get paid for treating a patient for a year, regardless of how much
Padma has the rights to any treasure on the sunken ship the Golden Calf. Aaron is a diver who specializes in marine salvage. If Padma is risk averse and Aaron is risk neutral, does paying Aaron a
Fourteen states have laws that limit whether a franchisor (such as McDonald's) can terminate a franchise agreement. Franchisees (such as firms that run individual McDonald's outlets) typically pay
In Exercise 4.2, suppose that, for each extra $1,000 of bonding the firm requires a worker to post, the firm must pay that worker $10 more per period to get the worker to work for the firm. What is
In 2012, Hewlett-Packard Co. announced that its new chief executive, Meg Whitman, would receive a salary of $1 and about $16.1 million in stock options, which are valuable if the stock does well
Adrienne, a manager of a large firm, must decide whether to launch a new product or make a minor change to an existing product. The new product has a 30% chance of being a big success and generating
List some necessary conditions for a firm to be able to sort potential employees by providing them with a choice of contracts?
In the Application "Layoffs Versus Pay Cuts," the firm either uses a pay cut or layoffs. Can you derive a superior approach that benefits both the firm and the workers?
A health insurance company tries to prevent the moral hazard of "excessive" dentist visits by limiting the number of compensated visits that a patient can make in a year. How does such a restriction
Will economics ever develop into an exact science? Why or why not?
Why do differences of opinion among economists on matters of economic policy occur so frequently?
In what ways does production involve more than the manufacture and fabrication of goods?
What are the four basic productive resources, and what form of compensation does each receive for its contribution to production?
Is it true that the more important a good or service is in our everyday lives, the higher the price we must pay to acquire it? Explain your answer and give examples.
Identify recent instances showing that distribution is a continuing problem in our economy.
Name some goods that were at one time free goods but are now economic goods.
How can the wealth of our nation be increased?
Should an estimate of the value of human capital be included in the measurement of our wealth? If so, how might it be measured?
What is the relationship between economic theory and economic policy?
To what extent do you engage in the process of economizing in your everyday activities?
Should a nation try to become as economically independent as possible? Why or why not?
Will an increase in the population of a given nation necessarily result in a decrease in the standard of living? Why or why not?
How will increased use of nuclear energy or other new sources of power affect the problem of scarcity?
How could nations that have an abundance of resources most effectively share them with nations that have inadequate resources?
What is meant by the following statement: "Goods and services are scarce because productive resources are scarce."
If productive resources in the United States doubled in the next five years, would the problem of scarcity be eliminated?
In reference to the production possibilities curve, how might a nation increase its total output if it is already fully employing its resources?
Distinguish between absolute advantage and comparative advantage.
Indicate some ways in which you or your friends practice the law of comparative advantage.
Discuss the importance of private property to the operation of a market economy.
Given your understanding of different economic systems, how would you classify the North Korean economy?
How does consumer demand influence the determination of individual income?
How does the price system serve as a rationing mechanism?
What is the role of profit in a market economy?
Distinguish between a market economy and a command economy.
What are some advantages of the corporate form of business?
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