2008ps2 - answer key

2008ps2 - answer key - BUAD 351 Economic Analysis for...

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Unformatted text preview: BUAD 351 - Economic Analysis for Business Decisions Homework 2 due: Wed 02/13/2008 PART (i): multiple choice question 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 answer d b a,d b b a b d b b c a b b c PART (ii) short questions 1. Explain brie&y what is meant by the compensating variation Compensating variation measures the amount of monetary compensation that a consumer needs to receive (or would be willing to pay) following a change in market conditions, such as a change in prices to leave him or her as well o¡ as she was with her original bundle (before the change in market conditions). 2. De¢ne consumer surplus. Knowing the equilibrium market price and the demand curve, how would you measure consumer surplus? Consumer surplus measures the total bene¢t a consumer derives from consuming a particular prod- uct minus the price paid. Consumer surplus is measured by the area below the (inverse) demand curve and above the price paid. That is, the di¡erence between marginal bene¢t and price for each unit of consumption. 3. Suppose that Frank is considering giving Mike eight paper back books in exchange for 2 CDs. Explain the conditions under which this trade would be mutually bene¢cial. Also explain the con- ditions under which Frank and Mike won£t make the trade. The e¡ective trade "price" is 4 books per CD. This trade would then be bene¢cial as long as Frank£s marginal rate of substitution MRS CD;book is greater than 4 books per CD and Mike£s marginal rate of substitution of paperback books for CD is less than 4 paperbacks per CD. If Frank£s MRS of paperbacks for CD£s is less than 4, he won£t agree to the trade. If Mike£s MRS of paperbacks for CD£s is greater that 4, he won£t agree to the trade. Of course, the trade could still take place under other terms 1 Part (iii) slightly longer questions 4. Assume Tom&s bene¡t function for water is U ( W ) = p W: There are two potential outcomes, drought and rainy season. In the case of drought, his water bundle is W d = 100 and in the case of rainy season, his water bundle is W r = 400 : The probability of drought is 3 = 4 : (a) Calculate the expected consumption of water 3 4 100 + 1 4 400 = 75 + 100 = 175 (b) What is Tom&s expected utility?...
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This note was uploaded on 07/23/2008 for the course BUAD 351 taught by Professor Eastin during the Spring '07 term at USC.

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2008ps2 - answer key - BUAD 351 Economic Analysis for...

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