2005finsoln - 2005 Final Examination Partial Answers PART A...

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2005 Final Examination - Partial Answers PART A: 1. see notes, with WTP L ( q = 0) = 1 4 WTP L ( q = 0) sell only to high demand 2. under Cournot, if both fi rms produce 1 2 q M each fi rm will still have an incentive to increase output since they get the full amount of the gain but only part of the infra- marginal loss. 3. see notes for shape of portfolio frontier. if when ρ = 1 , α = 1 then same optimal portfolio for both ρ = 1 and ρ = 1 4. r b = 100% 5. c c T = 1 1 (1 + r ) T if r = 0 , c c T = 0 because with no discounting the perpetuity’s coupon rate must be in fi nitely small. In generaly, as r increases ratio approaches 1 , perpetuity coupon payments received after T have smaller and smaller PV so coupon payments must be closer in size. As T increases ratio approaches 1 , the T year bond begins to look like a perpetuity. 6. Compare where indi ff erence curves cross the 45 degree line. 7. When π l is low there will be trade in both types, as π l increases there will be loss of the market for the good cars. Increasing variance won’t change E { WTP } > P g > P l , no loss of market. With risk aversion, higher variance may lead to loss of the market
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