Public Policy 201A
Final Exam
December 10, 2007
Please do not open your exam until 8:30 am.
There are 5 problems. Maximum score is 100.
I regard the problems at the end of the exam as tougher than the ones at
the beginning, so you probably want to budget
The Invisible Hand and When the
Market Fails
Public Policy 201A
1
Overview
The Invisible Hand: What is it and When
Does it Work?
Pareto Optimality
When is a C.E. Pareto Optimal?
Problems With Definition of Optimality
When is a C.E. not Pareto Optimal? (T
Option Pricing
Public Policy 201A
Summary
We can apply the state preference technology to
the pricing of options and other corporate
securities
In the limit as we move to continuous trading we
get an exact formula that does not depend on
knowing a secur
Capital Market Equilibrium
Public Policy 201A
The Problem
Investors each have utility functions
Investors each own initial portfolios
Each investor is a price taker
Investors trade to maximize expected utility
What will the market equilibrium look like?
W
Choice Under Uncertainty
Public Policy 201A
Summary
In real world risk plays an important role
We model risk tolerance by investors using
expected utility
Show why model is reasonable
Use it to analyze response to risky
investments
Then use it to dev
Natural Resource Pricing
Public Policy 201A
1
Overview
Case 1: Constant Marginal Costs, fixed
supply: Like football stadium problem
If monopoly charges more now it will charge
less at some future date than competitive
industry, assuming that supply is s
Disneyland and Bundling Problems
1. Central Bus Company has a monopoly on local bus transportation. It
runs scheduled routes, and its marginal cost of carrying extra passengers is
assumed to be zero.
Central has two million customers. One million are ligh
Product Line Pricing and
Bundling
Public Policy 201A
Homework #4
Focus on problems 1,2,3 and 9. The other
problems are largely similar and give you a
chance to try again without repeating the
exact same problems, if you get the first
ones wrong.
Overview
Nash Equilibrium
Public Policy 201A
Definition of Nash Equilibrium
A set of strategies is a Nash Equilibrium when
each players individual strategy is as good a
response to what the others are meant to do as any
other strategy available to that player.
T
The Biggest Auction Ever: The Sale of the British 3G
Telecom Licenses
Attached is a corrected version of the paper, supplied by the Economic
Journal in light of the number of typos in the originally published version.
Some typos remain in this corrected v
Adverse Selection
MGTECON 203
1
Adverse Selection
Most noted as a problem in insurance. For
example, when health insurers go into a
new market if they take on individual
customers they get killed.
2001 Nobel Prize: Akerloffs paper on the
Market for Lemo
Problems of Social Choice
Public Policy 201A
1
Problems of Social Choice
Arrows Impossibility Theorem:
Problems of designing voting mechanisms to
choose among >2 choices
The importance of strategic voting, and
controlling the agenda
Arrow theorem is h
Problems of Social Choice
Public Policy 201A
1
Problems of Social Choice
Arrows Impossibility Theorem:
Problems of designing voting mechanisms to
choose among >2 choices
The importance of strategic voting, and
controlling the agenda
Arrow theorem is h
Orange Juice Pricing
Public Policy 201A
1
Growth and Environment
Far Right: No reason for government to
worry about externalities, economic growth
is not an environmental problem
Far Left: Externalities are important as
prices dont reflect environmental
CAPM Homework
1. Throughout this problem assume that all consumers in the economy
have a utility function of
U (C0 , C1 , C2 , ) =
2
X
j =0
j Cj (1
1
Cj )
800
(1)
where Cj is the amount of consumption in state j and j is the probability of
state j occur
Answers to Natural Resources and
Competitive Pricing Homework
1. There are several ways to do this problem. A mathematically straightforward way is to write out the prot maximization problem of the rm over
the two periods as
max
q1 ;q2
q1 (300
q2 (300 q2
Price Discrimination in Oil
1. (30) An oil company owns substantial reserves in the state of Alaska.
It produces 500 mbd (thousand barrels per day) and must choose whether
to ship the oil to the West Coast of the United States or to the Far East.
Changing