Economics quiz

1-Asa buys a painting. There is a 28?% probability that the artist will become famous and the painting will be worth ?$2000. There is a 17?% probability that the painting will be destroyed by fire or some other disaster. If the painting is not destroyed and the artist does not become? famous, it will be worth ?$1000. The expected value of the painting is ?$______. ?(round your answer to the nearest? penny) 2-The EZ Construction Company is offered a ?$20 comma 000 contract to build a new deck for a house. The? company's profit if they do not have to sink piers? (vertical supports) down to bedrock will be ?$3 comma 000. ?However, if they do have to sink the? piers, they will lose ?$800. The probability they will have to put in the piers is 10?%. What is the expected value of this? contract? The expected value? (EV) of this contract is ?$________. ?(Enter your response rounded to two decimal? places.) 3-People in a certain group have a 0.25?% chance of dying this year. If a person in this group buys a life insurance policy for ?$4750 that pays? $1,000,000 to her family if she dies this year and? $0 otherwise, what is the expected value of the? policy? ?$_______ ?(enter a minus sign if necessary and round your answer to the nearest dollar?). 4-Guojun offers to bet Kristin that if a? six-sided die comes up with one or two dots? showing, he will pay her ?$3.00?, but if it comes up with any other number of? dots, she'll owe him ?$2.20. Is that a fair bet for? Kristin? (The bet (is or is not) fair options ) 5-An insurance agent? (interviewed in Jonathan? Clements, "Dare to Live? Dangerously: Passing on Some Insurance Can Pay? Off," Wall Street Journal?, July? 23, 2005,? D1) states,? "On paper, it never makes sense to have a policy with low deductibles or carry collision on an old? car." But the agent notes that raising deductibles and dropping collision coverage can be a tough decision for people with a low income or little savings. Collision insurance is the coverage on a? policyholder's own car for accidents where another driver is not at fault. Suppose that the loss is ?$5 comma 200 if an old car is in an accident. During the? six-month coverage? period, the probability that the insured person is found at fault in an accident is StartFraction 1 Over 36 EndFraction . Suppose that the price of the coverage is? $150. Should a wealthy person purchase the? coverage? A. ?Yes, the expected loss over the term is ?$144.00 hence the coverage is justifiable. B. ?No, the expected loss over the term is ?$136.00?, hence the coverage is not justifiable. C. ?No, wealthy people never choose? insurance, they can always replace the item that is lost. D. ?No, the expected loss over the term is ?$144.00?, hence the coverage is not justifiable. 6-A risk neutral investor in an uncertain environment is facing the following payoffs and probabilities for an investment? project: Outcome ?Pr(outcome) Payoff Strong economic growth 0.30 ?$150000 Weak economic growth 0.60 ?$85000 Negative economic growth? (recession) 0.10 ? $25000 What is the most this investor is willing to invest in such a? project? The investor would be willing to invest at most ?$_______ . ? (round your answer to the nearest penny?) 7-A town council is considering building a new bridge over a small river that runs through the town to reduce congestion on the existing bridge and reduce commuting times. Each of 2 comma 000 commuters who must cross the bridge would experience a benefit of ?$16 per day from saving commuting time. The bridge would be financed through increased property taxes that amount to ?$1 per day for each of the 40 comma 000 households in the town. Would the bridge pass a? cost-benefit test? The bridge (would pass or would not) the? cost-benefit test. 8-Suppose that the only two firms in an industry face the market? (inverse) demand curve p=130-Q. Each has constant marginal cost equal to 16 and no fixed costs. Initially the two firms compete as Cournot rivals? (Chapter 11) and each produces an output of 38. Why might these firms want to merge to form a? monopoly? What reason would antitrust authorities have for opposing the? merger? ?(Hint?: Calculate? price, profits, and total surplus before and after the? merger.) The firms would favor the merger because combined profit would increase by ?$_____ and the? profit-maximizing price would increase by ?$________ . ?(Enter your response rounded to two decimal? places.) 9-Suppose that the only two firms in an industry face the market? (inverse) demand curve p=130-Q. Each has constant marginal cost equal to 10 and no fixed costs. Initially the two firms compete as Cournot rivals? (Chapter 11) and each produces an output of 50. Why might these firms want to merge to form a? monopoly? What reason would antitrust authorities have for opposing the? merger? ?(Hint?: Calculate? price, profits, and total surplus before and after the? merger.) Suppose that each firm has fixed? costs, F, of ?$2000 that are avoidable if a firm does not produce. The firms would favor the merger because combined profit would increase by ?$______and the? profit-maximizing price would increase by ?$_____ nothing. ?(Enter your response rounded to two decimal? places.) 10- Austin is going on holiday with his infant daughter and has a first class air ticket. He values being in first class instead of coach at ?$350. A CEO has the seat adjacent to him and is considering offering to pay Austin to move to one of the empty seats in coach. The CEO values quiet at ?$600. Can Austin and the CEO reach a mutually agreeable price for Austin to move to? coach? Austin and the CEO(can or cannot)reach a mutually agreeable price for Austin to move to coach. 11-Woz Enterprises specializes in electrical components. The market for one particular component is perfectly competitive and in long run equilibrium. The marginal cost is constant at 30. Woz can develop a much cheaper process for producing this? component, lowering its marginal cost to 6. The? R&D cost of developing the new process would be F and Woz would be able to obtain a patent for it and become a monopoly supplier of this component. Demand for the product over the relevant period is given by p=50-2Q. Show the? R&D investment would be worthwhile? (raise profit) for Woz if F=217 but not if F=302. If F=217?, then the? monopoly's profit including the cost of the? R&D investment if it invests is pie=?$_______ ?(Enter your response as a whole? number.)