Homework Week 1 - Conner - BUS5421 Managerial Economics...

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BUS5421 Managerial Economics Homework Week 1 Stephen Conner August 1, 2016 Problem 2.3 Flood Insurance The U.S. government subsidizes flood insurance because those who want to buy it live in flood plain and cannot get reasonable rates. What inefficiency does this create? These subsidies are effectively destroying wealth. These subsidies encourage people to live in areas that are susceptible to flood by effectively lowering the price of the insurance. By lowering the price it makes it affordable for people to construct homes in flood plains. This pushes higher-value assets – construction materials, money, labor – in to lower-value assets, by subjecting them to the risk of flood. Without the subsidies, the people building would not be able to afford the insurance and would build in less risky areas. Problem 3.1 Concert Opportunity Cost You won a free ticket to see a Bruce Springsteen concert (assume the ticket has no resale value). U2 has a concert on the same night, and this represents your next-best alternative activity.

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