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Economics 103 Professor Friedman Spring 2016 Your Name:__________________________________________ Your...

Can you please answer the uploading problem set? Please do it correctly. This problem set is about microeconomics.

1 Economics 103 Your Name:__________________________________________ Professor Friedman Your TA:____________________________________________ Spring 2016 Your Section Time and Day:_____________________________ Problem Set 3 Due Date: May 2 at 5PM Hand in hard copy in your TA’s mailbox, 8 th floor of Thompson Do not submit answers on line through Moodle Note that there are two types of problems. You are encouraged to work with someone else in your TA section on the quantitative problems (1, 2, 3); hand in one set of answers to these problems with both your names. You should do the essay question (4) individually and append separate answers with each person’s name for these to your group answers to the quantitative problems. Type your answers; hand-written answers will be accepted only by special arrangement. Staple pages together. Be sure to keep a copy of your answers in case of problem. Total 20 points. 1) (7 points) Insurance and social policy You are making an app with a 5% chance of making a ton-load of money, and 95% chance of earning nothing. Your utility is the square root of income (Utility = Y 1/2 ); you will have $10,000,000 1/2 happiness if your app succeeds but 0 1/2 happiness if it fails. a) (2 points) What is the expected value of your app? How much money can you expect to make? What is your utility at that income (if you know that your income will be the expected value of your app)? Note that in EXCEL, the square root function is “=X^.5” for the number X b) (1 point) What is your expected utility from your app? (Note: this is the weighted average of utility when the app succeeds and when it fails where the weight is the probability of success.) c) (2 points) Why do people buy insurance? How can insurance companies profit? What happens to expected utility when people can buy insurance at a fair market price? d) (2 points) What is moral hazard and what is adverse selection . How do these affect insurance markets? Give examples from the marketing of veterinary insurance. Would you expect markets with moral hazard and adverse selection to provide the optimal amount of veterinary insurance at an efficient price? 2) (5 points) Equilibrium discrimination and crowding . Suppose there are two occupations, economists and psychologists. a) (2 points) Draw hypothetical supply and demand graphs for men and women to both occupations assuming that some of each gender prefers each job. Now, assume that discriminatory actions take place preventing men from becoming psychologists. Show the effects of discrimination on your graph.
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2 b) (2 points) Who benefits and who loses from this discrimination? Show the effect of discrimination on wages and employment in both occupations and on total output in each. (Hint: have one graph for economists, and a separate one for psychologists.) c) (1 point) Are there circumstances where the government should not prevent discrimination? 3) (4 points) Long-run competition . Most of the cost of a new airplane is in the research and development and in building production facilities. By contrast, the marginal cost of producing another plane is relatively low. a) (2 points) You have been hired by Boeing to recommend pricing and marketing strategies for a new plane. On one graph: Draw a hypothetical Average Total Cost (ATC) curve, the Marginal Cost curve, and a Demand (MU) curve for the plane. (Hint: The point where Demand intersects MC should be below the ATC curve.) b) (2 points) Show the area of net profit (or loss) under perfect competition for planes as the difference between average total cost and the average revenue (or the price). (Note that Boeing’s profit is the number of phones sold times price minus ATC.) What will happen to the price of planes, to sales, and to profits when Airbus comes out with a new plane?? What happens to the industry and the number of companies under competitive conditions? Why? 4) (4 points) Health insurance. Read Gerald Friedman, “Universal Health Care: Can we afford anything less?” at http://www.truth-out.org/opinion/item/1982:universal-health-care-can-we- afford-anything-less a) What has happened to the cost of health care in the United States since the early 1970s? What has happened to costs in other countries with national health insurance systems? b) Why has private health insurance led to worse health outcomes for Americans?
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1) (7 points) Insurance and social policy You are making an app with a 5% chance of making a tonload of money, and 95% chance of earning nothing. Your utility is the square root of income (Utility...

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