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HW _2-2010 - HW#2 2010 15 pts Due Weds Jan 20th 1 Suppose...

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HW #2 2010 – 15 pts Due Weds Jan 20th 1. Suppose the Surgeon General issues a report saying each cup of coffee consumed takes 1 day off your life. The problem is you enjoy drinking coffee. Suppose you value each day of life at 20 utils (units of utility). Currently you drink 3 cups of coffee a day and get a total of 70 utils. Imagine that coffee is free so that the only cost is a day of life. Should you cut back on your consumption of coffee? If so how many cups a day is it efficient to drink? If there is not enough information tell me what additional information would be required. (1 ½ pts) 2. The Red Cross is deciding between two programs for decreasing deaths due to recent tsunami. They can hire more doctors, they build wells for clean drinking water or they can do some of each. (3 pts) Number of doctors Total Lives Saved Total Cost 1 10 $100,000 2 13 $200,000 3 15 $400,000 Number of wells Total Lives Saved Total Cost 5 8 $100,000 10 12 $200,000 15 14 $300,000 20 15 $400,000 a. Offer a story for why wells should/shouldn’t exhibit diminishing marginal returns. b. If the Red Cross has received $400,000 in donations for this cause how should they spend it to maximize the number of lives saved? [Remember they can divide the money between the two options].
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