Category: Economics

Assuming you are risk neutral, first answer the following two questions about your preferences:
Scenario A:
You are given $5,000 and offered a choice between receiving an extra $2,500 with certainty or flipping a coin and getting $5,000 if heals or $0 if tails. Which option do you proten?
The certain $2,500 is more valuatle than the uncertain $5,000, I would choose the $2,500.
Both options have identical payofts, so I am indifferent between the two options.
The possibility of the $5,000 payoff is more valuable to me than the certain $2,500, 1 choose to fip a coin.
Scenario B:
You are given $10,000 if you will make the following choice: reham $2,500 or flip a coin and return $5,000 if heals and $5 if tals. Which eqtion do you preflen?
Both options have identical payoffs, so I am indifferent between the two options.
The possibility of the loss of $5,000 is more painful to me than the certain loss of $2,500, I would choose the $2,500 certain loss.
The certain loss of $2,500 is more painful than the possible loss of $5,000, I choose to flip a coin.
Most people choose the sure $2,500 in the first case but fip the coin in the second. Why is this behavior is not consistent to a rak neutral person?
The behavior is not consistent because soenario B is riskier.
The behavior is not consistent because a risk neutral person is always able to choose the less risky option.
The behavior is consistent because scenario B is riskier.
The behavior is not consistent because the two experiments have equal payoffs.

4. Deriving the short-run supply curveConsider the perfectly competitive market for sports jackets. The following graph shows the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves for a typical firm in the industry.For each price in the following table, use the graph to determine the number of jackets this firm would produce in order to maximize its profit. Assume that when the price is exactly equal to the average variable cost, the firm is indifferent between producing zero jackets and the profitmaximizing quantity. Also, indicate whether the firm will produce, shut down, or be indifferent between the two in the short run. Lastly, determine whether it will make a profit, suffer a loss, or break even at each price.Price (Dollars per jacket)Quantity (Jackets)On the following graph, use the orange points (square symbol) to plot points along the portion of the firm’s short-run supply curve that corresponds to prices where there is positive output.(Note: You are given more points to plot than you need.) Suppose there are 9 firms in this industry, each of which has the cost curves previously shown.On the following graph, use the orange points (square symbol) to plot points along the portion of the industry’s short-run supply curve that corresponds to prices where there is positive output.(Note: You are given more points to plot than you need.) Then, place the black point (plus symbol) on the graph to indicate the short-run equilibrium price and quantity in this market.Note: Dashed drop lines will automatically extend to both axes.At the current short-run market price, firms will in the short run. In the long run, .

Mays and McCovey are beer producers that operate in a duopoly (two-firm oligopoly). The daily marginal cost (MC) of producing a can of beer is constant and equals $0.60 per can. Also, assume that neither firm had any startup costs. That is, marginal cost equals average cost (AC) for each firm.
Suppose that Mays and McCovey form a cartel, and the firms divide the output evenly. (Note: This is only for convenience, since nothing in the model requires that the two companies must equally share the output.)
Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and combined quantity of output if Mays and McCovey choose to work together. Note: Drop lines will extend to both axes automatically. When they act as a profit-maximizing cartel, each company will produce 40 cans per day and charge $0.80 per can. Given this information, each firm earns a daily profit of $4, so the total industry profit in the beer market is $8 per day.
Suppose you analyze the previous situation using the Bertrand model. Which of the following are assumptions of this model? Check all that apply.
The goods are perfect substitutes.
Firms choose to produce quantities as best responses to the quantity the other firm produces.
All sales go to the firm with the lowest price.
Again using the Bertrand model, which of the following statements is true of the point representing the cartel price and quantity you found previously?
Either firm could increase its profits by decreasing the price it charges.
It is a Nash equilibrium.
Either firm could increase its profits by increasing the price it charges.

The following graph shows the domestic demand for and supply of oranges in Guatemala. The world price (PWPW) of oranges is $550 per ton and is displayed as a horizontal black line. Throughout the question, assume that all countries under consideration are small, that is, the amount demanded by any one country does not affect the world price of oranges and that there are no transportation or transaction costs associated with international trade in oranges. Also, assume that domestic suppliers will satisfy domestic demand as much as possible before any exporting or importing takes place.
A graph plots domestic supply and demand for oranges in Guatemala with price in dollars per ton on the y-axis ranging from 480 to 830 in increments of 35 and quantity in tons of oranges on the x-axis ranging from 0 to 500 in increments of 50. The graph plots a downward sloping straight line curve labeled domestic demand ranging from (0, 830) to (500, 480), and an upward sloping straight line curve labeled domestic supply ranging from (0, 480) to (500, 830). A horizontal line labeled P sub W extends from (0, 550) to (500, 550), intersecting the domestic supply curve at (100, 550), and the domestic demand curve at (400, 550).
If Guatemala is open to international trade in oranges without any restrictions, it will import tons of oranges. Suppose the Guatemalan government wants to reduce imports to exactly 200 tons of oranges to help domestic producers. A tariff of per ton will achieve this. A tariff set at this level would raise in revenue for the Guatemalan government.

COMPARATIVE AND ABSOLUTE ADVANTAGES
Boards Waxed
Boards Repaired
Sean
7.5 min
20 min
Sadie
12 min
30 min
OPPORTUNITY COSTS
Sean Sadie Soards Waxed

? Boards Repaired

San ( ? )
Question 5: Looking at the graph above, calculate the opportunity cost for Sean on boards waxed per hour. Sean’s opportunity cost for boards waxed is Enter a decimal number (ex. 1, 1.0, 10.01, . 1001)
Question 6: Looking at the graph above, calculate the opportunity cost for Sean on boards repaired per hour. Sean’s opportunity cost for boards repaired is W. Enter a decimal number (ex. 1, 1.0, 10.01, .1001)
Question 7: Looking at the graph above, calculate the opportunity cost for Sadie on boards waxed per hour. Sadie’s opportunity cost for boards waxed is R. Enter a decimal number (ex. 1, 1.0, 10.01, .1001)
Question 8: Looking at the graph above, calculate the opportunity cost for Sadie on boards repaired per hour. Sadie’s opportunity cost for boards repaired is N. Enter a decimal number (ex. 1, 1.0, 10.01, .1001)

For each of the following scenarios, analyze the effects of the given supply or demand shock on the respective market. In your response, clearly identify whether the shock primarily affects supply or demand, how supply or demand changed, and explain the expected impact on equilibrium price and quantity, assuming other factors remain constant. Then illustrate the changes using the diagrams provided on the second page. In each diagram: Label the initial equilibrium price and quantity as P₁ and Q₁. Label the new equilibrium price and quantity after the shock as P₂ and Q₂. Links to relevant articles are given to provide additional context for each scenario. However, reviewing or referencing them in your answers is not required or expected.
Market: GLP-1s (e.g., Ozempic)
Shock: Recent findings show that GLP-1 receptor agonists, like Ozempic, are highly effective in treating diabetes and promoting weight loss. Relevant story here. Pharmacy in Focus: Navigating GLP-1 demand, cost, and sustainability | Evernorth
Market: Gasoline
Shock: OPEC Plus, the cartel of oil-producing countries, has announced an increase in oil production. Crude oil is the primary input in gasoline production. Relevant story here.
Market: Tesla Cars
Shock: Public perception of Tesla has been affected by Elon Musk’s political and social media activity, leading some consumers to reconsider their purchase of Tesla’s vehicles. Relevant story here.
Market: New Cars
Shock: The Trump Administration has announced plans to impose 25% tariffs on all foreign-made vehicles and auto parts. Relevant story here.

COMPARATIVE AND ABSOLUTE ADVANTAGES
Boards Waxed
Boards Repaired
Sean
7.5 min
20 min
Sadie
12 min
30 min
OPPORTUNITY COSTS
Question 5: Looking at the graph above, calculate the opportunity cost for Sean on boards waxed per hour. Sean’s opportunity cost for boards waxed is Enter a decimal number (ex. 1, 1.0, 10.01, . 1001)
Question 6: Looking at the graph above, calculate the opportunity cost for Sean on boards repaired per hour. Sean’s opportunity cost for boards repaired is W. Enter a decimal number (ex. 1, 1.0, 10.01, .1001)
Question 7: Looking at the graph above, calculate the opportunity cost for Sadie on boards waxed per hour. Sadie’s opportunity cost for boards waxed is R. Enter a decimal number (ex. 1, 1.0, 10.01, .1001)
Question 8: Looking at the graph above, calculate the opportunity cost for Sadie on boards repaired per hour. Sadie’s opportunity cost for boards repaired is N. Enter a decimal number (ex. 1, 1.0, 10.01, .1001)

Following a report of higher prices (inflation) in country A (the domestic currency, CA), the balance of payments re-equilibration occurs in which order? – 1. 2. 3. 4. 5. 6. 7. 8.
Domestic agents increase their supply of the domestic currency (DC) in the FX market to trade (M) – 1. 2. 3. 4. 5. 6. 7. 8.
The DC depreciates from the current account – 1. 2. 3. 4. 5. 6. 7. 8.
The domestic interest in M increases (cheaper imports) – 1. 2. 3. 4. 5. 6. 7. 8.
Domestic agents decrease their interest in imports (M) since the relative price has increased (takes more DC to buy the FC to buy M) – 1. 2. 3. 4. 5. 6. 7. 8.
The DC depreciates from the current account as a part of the LR re-equilibration – 1. 2. 3. 4. 5. 6. 7. 8.
The DC appreciates (from the current account) – 1. 2. 3. 4. 5. 6. 7. 8.
Domestic agents decrease their supply of the domestic currency (DC) in the FX market since they buy fewer imports (M) – 1. 2. 3. 4. 5. 6. 7. 8.
The relative price (RP) of imports (M) dereases (i.e. it takes less DC to buy the FC to trade in the same amount of M)

a. James Gitau owns a manufacturing business and is considering whether to expand it or not. He has gathered the following information about the possible states of nature for the various strategies.
Alternatives
Favourable Market (High Demand)
Unfavourable Market (Low Demand)
Construct large plant
£200,000
£-180,000
Construct small plant
100,000
-20,000
Do nothing
0
0
Determine the optimal decision if the environment is that of certainity.
Suppose the decision environment facing Gitau is that of risk, so that, the probability of favourable and unfavourable markets are 50 % each, determine the optimal decision (use EMV criterion)
What is the expected value of perfect information (EVPI)?
b. Suppose in the case of Mr. Gitau (in (a) above), before he considers whether to build a large plant or a small plant or to do nothing, he contemplates conducting a market survey, which costs £10,000. Though it may not provide him with perfect information, he knows that it may helpful never-the -less. The reliability of such surveys in predicting actual states of nature in the past have been:
Survey Results
Favourable Market
Unfavourable Market
Positive
0.7
0.2
Negative
0.3
0.8
Use the survey information below to revise the PRIOR probabilities of the states of nature.
Construct a decision tree for this problem and determine the optimal decision.
Determine the expected value of sample information (EVSI).
Determine the efficiency of sample information.