ECO
200 Test 2.pdf

# What is the most joe will pay to mary g25 100 1 9 has

• Test Prep
• 4

This preview shows pages 1–4. Sign up to view the full content.

What is the most Joe will pay to Mary? G(25, 100: .1, .9) has EU = 9.5 so 100 – Fee = 9.5 2 satisfies Fee = 9.75 6. [1 Mark] The interest rate is 5%. What is the present value of an annuity that pays \$1,000 per year for 20 years? PV = C/r x [1 – 1/(1+r) 20 ] = 12,462

This preview has intentionally blurred sections. Sign up to view the full version.

SURNAME, Name: __________________________ Number: ______________________ 7. [3 Marks] Rhoda takes a job with a construction company. She earns \$5 an hour for the first 40 hours of the week and then gets paid “double-time” \$10 for overtime. She has 70 hours a week to allocate between work and leisure. Her utility for food and leisure is given by u (c, r) = cr . She has no other sources of income. Provide a labelled diagram showing hours worked, leisure and consumption. Without overtime: F = 5Z, F + 5Z = 350 imply Z = 35, F = 175, H = 35, u = 6125 With overtime: F = 10Z, F + 10Z = 5 × 40 + 10 × 30 = 500 imply Z = 25, F = 250, H = 45, u = 6250 She will work 45 hours per week.
SURNAME, Name: __________________________ Number: ______________________ 8. [3 Marks] A two-period consumer with utility function u (c 1 , c 2 ) = c 1 c 2 earns 2400 in period 1 and nothing in period 2. He can borrow or lend at a risk-free interest rate of 25 percent but a mutual fund offers savers a return of 80 percent. Provide a labelled indifference curve diagram to show the most he will pay to invest in this mutual fund. Use a Hicksian compensation. c2 = 1.25c1, c1 + c2/1.25 = 2400 imply c1 = 1200, u = 1.25 x 1,200 2 c2 = 1.8c1 and c1c2 = 1.25 x 1200 2 imply 1.44c1 2 = 1200 2 , c1 = 1000, c2 = 1800 1000 + 1800/1.8 = 2000 so WTP = 2400 – 2000 = \$400.

This preview has intentionally blurred sections. Sign up to view the full version.

SURNAME, Name: __________________________ Number: ______________________ 9. [3 Marks] Rebecca will make up her portfolio holding a risk-free asset that offers a return of 10% and a risky asset with an expected return of 30% but a standard deviation of 5 percent. Her preferences are u (μ, σ) = μ – σ 2 . Provide a labelled indifference curve diagram showing the expected return and standard deviation for her portfolio. μ = 10 + 4σ with o-cost = 4 and MRS = 2σ imply σ = 2. Since σ = 5x know x = 0.4. Invest 40 percent in risky asset.
This is the end of the preview. Sign up to access the rest of the document.
• Summer '15
• RobertBarber

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern