Discussion section problem set 8 econ 200

Discussion section problem set 8 econ 200 - profit of $1.50...

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Problem Set 8 Economics 200 We will discuss these problems in discussion sections on Wednesday, December 9 and Friday, December 11. 1. Smith purchases a dozen eggs and must take them home. The probability that all of the eggs carried on any one trip will be broken during the trip is one-half. Trips home are costless. Smith is considering two strategies: (i) take all of the eggs in one trip, or (ii) take two trips with six eggs in each trip. Show that if Smith is risk averse, then he should not put all of his eggs in one basket. 2. You are thinking of buying an oilfield. The probability that there are zero barrels of oil in the field is 1/3, the probability that there are 30 barrels of oil in the field is 1/3, and the probability that there are 120 barrels of oil in the field is 1/3. The current owner of the oilfield could earn a profit of $1.00 on each barrel of oil and so, for example, if there are 30 barrels of oil he will earn a profit of $30. You are a very efficient oil producer and you could earn a
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Unformatted text preview: profit of $1.50 on each barrel of oil. Therefore, if there are 30 barrels you would earn a profit of $45. The owner has done extensive geological studies and knows the number of barrels of oil in the field, but you do not. You are risk neutral. For simplicity, assume that if the current owner is indifferent between accepting and rejecting your offer he will accept. What the maximum price you would offer for this oilfield? 3. Suppose that at your firm, the relationship between output produced and the number of workers you hire is as follows: Labor Total product 1 12 2 23 3 32 4 38 5 42 6 45 (a) Is the relationship between output and labor in this problem consistent with the law of diminishing returns? (b) Suppose your firm is a perfect competitor in the output market and the labor market. If the price of output is $9 and the wage rate is $27, how many workers should your firm hire? (c) If the price of output falls to $3 and the wage remains $27, how many workers should your firm hire?...
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