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Problem set2_2010

# Problem set2_2010 - Professor Emmanuel Saez GSI Mark and...

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Professor Emmanuel Saez Economics 131 GSI: Mark and Francois Problem Set 2 Due Monday March 8th in class. Question 1 Short Answer: Please be succinct (less than 3 sentences). A) True/False/Uncertain: We know from the Median Voter Theorem that policies will converge on those policies preferred by the average citizen. B) True/False/Uncertain: The wage is a good proxy for opportunity costs of labor. C) Think about the following local public good – is the tiebout model likely to hold? 1. Local free food shelter program for the homeless. 2. Local police enforcement in Berkeley. 3. Local high quality public school, without zoning. 4. Local high quality public school, with zoning. D) True/False/Uncertain: The Contingent Valuation approach is likely to provide a good estimate of the valuation of a public good for individuals. Question 2 Consider a project to start an internet café. It costs \$200,000 to buy the computers, all of which are purchased in the first year. The café provides an income of \$50,000 a year for five years. At the end of the 5 th year the computers are obsolete and must be thrown away. It costs \$20,000 to dispose of the computers. a) Should the project be undertaken at a 0% discount rate? 10%? 20%? b) Suppose that the cost of computer disposal is uncertain and that there is a fifty-fifty chance that the cost will be \$10,000 and \$30,000. How does this uncertainty affect the cost-benefit calculation in part a, assuming that the entrepreneur is: (1) risk-neutral and (2) risk-averse?

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Problem set2_2010 - Professor Emmanuel Saez GSI Mark and...

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