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Economics

1.You win a 'Microeconomic course' lottery and are offered the choice of a lump sum payment of $975,000.00 (NOW) or five annual payments of $175,000.

 

What is the lottery's payment plan implied rate of time preference (approximation is OK)? Show payment stream versus lump sum payment calculation table.

 

Dr Q takes the lottery payments is the Dr's implied rate of time preference higher or lower than the lottery's time preference?

 

Would you take the lottery lump payment of $975,000 or the lottery's 5 annual payments of $175,000? Briefly explain the rationale for your decision.

 

2.Construct the graph(s) of, and explain the differences between, a 'Simple Monopoly' and a 'Perfectly Price Discriminating Monopoly'?

 

What quantity of goods/services would these entities produce given the same cost structure?

 

What happens to 'Consumer Surplus', 'Excess Profit' and, 'Dead Weight Loss', as a market evolves from 'Simple Monopoly' to 'Perfectly Price Discriminating Monopoly'?

 

3.What is the 'Prisoner's Dilemma'? Illustrate the 'Prisoner's Dilemma' Table.

 

How can this model be applied to economic behavior of firms? Why is a cooperative solution so difficult to achieve?

 

4.Agents A, B and C are offered the opportunity to play a (fair) coin toss game with the following rules:

 

To win a $5 million payout the agent must correctly call three consecutive fair coin tosses. However, a guaranteed payment offer is made to A, B, and C before each coin toss.

 

Game 1) A is offered a $250k payment before the first coin toss and chooses to take the $250k payment.

 

Game 2) B is offered a $250k payment before the first coin toss. B elects to call the first coin toss and wins the toss. B is then offered and accepts a $1million payment before the second coin toss.

 

Game 3) C is offered a $250k payment before the first coin toss. C elects to call the first coin toss and wins the toss. C is then offered a $1.25 million payment before second coin toss. C elects to call the second coin toss and wins the toss. C is then offered $3 million payment before third coin toss.

 

Would you expect C take the $3 million payment or call the third coin toss? Explain your rationale behind your expectation.

 

What can be inferred about A's, B's and C's risk preferences (tolerances)?

 

Show table of calculations utilized to explain and support your inferences. 

 

5. Anne and Beth work for MCC Financial (a firm that sells Economic Forecasting Service Contracts - EFS). Their productivity measures per a 40 hour work week are as follows:

 

Anne is capable of selling 20 EFS Contracts in 40 hours OR underwriting 10 EFS contracts in 40 hours.

Beth is capable of selling 40 EFS Contracts in 40 hours OR underwriting 80 EFS contracts in 40 hours. What is the Maximum amount Anne and Beth can make per week working alone?

 

payment received on the completed execution of an EFS contract is $1500 per contract, the sales commission received is $500 and the underwriting fee received is $1000. to receive payment the EFS contract has to be sold & underwritten in the same 40 hour work week.

 

What is the Maximum amount Anne and Beth can make per week working alone?

What is the Potential Gain from Cooperation if they trade services?

Is a compensation payment between Anne and Beth necessary to secure cooperation? What happens to Dead Weight Loss(es) if they cooperate?

Show the table of, and explain, your calculations

 

6.Construct graphs illustrating market equilibrium levels of output for:

 

A) a perfectly competitive market; and B) a perfect price discriminating monopoly.

 

Explain the differences between these two market solutions for consumer welfare (consumer surplus) and the producer surplus (excess profits).

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