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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)se
llonlytohighdemand
2. under Cournot, if both
f
rms produce
1
2
q
M
each
f
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
=
−
1and
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
f
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
aperpetu
ity
.
6. Compare where indi
f
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
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