Practice_exam_2B

# Suppose that the probability that a coin comes up

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16.) Suppose that the probability that a coin comes up heads is exactly 0.5. According to the Law of Large Numbers, how many times would you have to flip the coin to be absolutely certain that the fraction of times it comes up heads will be exactly 0.5? a.) 100 b.) 1,000 c.) 1,000,000 d.) none of the above 17.) Costly signaling can resolve an asymmetric information problem provided that with the inferior product to send the signal the inferior product to send the signal costs the person with the inferior product to send the signal

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page 5 of 6 PART II: FILL IN THE BLANK (32 points total)—credit for correct answer only (no partial credit) 19.) (4 points each, 12 points total). Consider the following diagram, which shows a private demand curve given by the equation P = 40 - 0.1Q. You should assume that the good can be produced at a constant private marginal cost of \$20 per unit and that there is an external marginal benefit of \$10 per unit produced. a.) What will be the quantity and price associated with competitive equilibrium in this market be? b.) Suppose that the government provides a subsidy of \$10 per unit. As a result of the subsidy, does total economic surplus go up or down? By how much? c.) What is the total cost to taxpayers of the subsidy? Price Quantity 10 20 30 40 200 300 400 100
page 6 of 6 20.) (4 points each, 8 points total) A village has five residents, each of whom has accumulated savings of \$50. Each villager can use the money to buy a government bond that pays 10% interest per year or to buy one one-year-old goat, send it onto the commons to graze, and sell it after one year. The price of the goat that the villager will get at the end of the year depends on the amount of weight it gains while grazing on the commons, which in turn depends on the number of goats sent onto the commons, as shown in table below. Number of goats on the commons Price per 2-year-old goat (\$) Income per goat (\$ per year) 1 80 30 2 75 25 3 70 20 4 65 15 5 60 10 a.) If the commons are open to any of the residents to use, and each resident makes a decision whether to buy a goat to graze on the commons based on their own personal best interest, how many goats will there be on the commons? b.) What is the socially optimal number of goats? 21.) (4 points each, 8 points total) Consider a risky bet that will gain you \$20 with probability 0.5 but lose you \$10 with probability 0.5. a.) Calculate the expected value of this bet. b.) Is it possible that a risk-averse person would be willing to pay \$1 in order to be able to take this gamble? Explain.

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page 7 of 6 Answers: 1a 2a 3a 4c 5c 6b 7d 8b 9c 10b 11d 12a 13b 14b 15a 16d 17b 19a Q = 200 P = 20 19b up by 500 19c 3,000 20a 5 20b 3 21a 5 21b yes, it depends on how risk averse
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