2003finalpsoln - 2003 Final Examination Partial Answers 1...

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2003 Final Examination - Partial Answers 1. PART B: 1. monopoly/oligopoly (a) Q M = 200 , P M = $600 , ε = 3 2 (b) P = $350 (c) R 2 ( q 1 ) : q 2 = 200 2 5 q 1 (d) q S 1 = 166 2 3 , q S 2 = 133 1 3 2. Cournot (a) t 0 1 c -17,000 16,000 NPV = 2454 . 55 < 0 do not invest (b) E { P } = $22 (c) E { NPV } = $3000 > 0 invest (d) E { NPV lease } = 2000 > 0 but less than ( c ) . Invest today (e) E { NPV lease } = 4727 . 27 > 0 greater than E { NPV today } , buy lease, delay invest- ment 3. insurance (a) graph (b) Mark will fully insure, buys $20,000 coverage, E { profits } = 0 (c) graph. problem of moral hazard, Mark will say he has purchased the navigation system but won’t actually purchase it
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