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survey of economics

Questions and Answers of Survey Of Economics

=+get $10,000 from the company (her original investment of $4,000 plus $6,000 of the company’s profits).
=+ Vicky will get nothing from the company. But if the company succeeds, she will
=+Vicky currently has income of $4,000. She is considering investing in a startup company, but the investment now costs $4,000 to make. If the company fails,
=+3. Vicky N. Vestor’s utility function was given in Problem 2. As in Problem 2,
=+d. What is Vicky’s utility from not making the investment? Will Vicky therefore invest in the company?
=+c. Calculate Vicky’s expected utility from making the investment.
=+b. Calculate the expected value of Vicky’s income if she makes this investment.
=+a. Calculate Vicky’s marginal utility of income for each income level. Is Vicky riskaverse?
=+(and lose her investment). The accompanying table illustrates Vicky’s utility function.Income ‘Total utility (utils)So 0)1,000 50 2,000 85 3,000 15 4,000 140 5,000 163 6,000 183 7,000 200 8,000
=+will pay out $8,000 to Vicky (her original investment of $2,000 plus $6,000 of the company’s profits). And there is a 0.5 probability that the company will fail and Vicky will get nothing
=+2. Vicky N. Vestor is considering investing some of her money in a startup company. She currently has income of $4,000, and she is considering investing $2,000 of that in the company. There is a
=+of weather being unfavorable is 0.1. What is the expected value of Aaron’s profit?
=+If the weather is unfavorable, he will make a profit of $20 (that is, he will lose money). The weather forecast reports that the probability of weather being favorable is 0.9 and the probability
=+c. Aaron is a farmer whose rice crop depends on the weather. If the weather is favorable, he will make a profit of $100.
=+What is the expected value of Sharon’s winnings?
=+There is a probability of 0.7 that she will win nothing, of 0.2 that she will win $10, and of 0.1 that she will win $50.
=+b. Sharon buys a ticket in a small lottery.
=+What is the expected value of the future share price?
=+which is currently trading at $80. There is a 50% chance that the share price will rise to $100 and a 50% chance that it will fall to $70.
=+a. Tanisha owns one share of IBM stock,
=+1. For each of the following situations, calculate the expected value.
=+What principle does this illustrate?
=+ 4. Why did Buchmueller purchase insurance policies from big, global insurance companies to cover up to 75% of his own losses?
=+3. What were the sources of Buchmueller’s innovation that allowed him to succeed in the presence of moral hazard and adverse selection?
=+2. How does the case illustrate market failure due to adverse selection:
=+1 What is one example of moral hazard by homeowners in hurricane-prone areas? Explain.
=+a. Generally drive more carefullyb. Pay lower premiumsc. Generally are wealthier
=+ People with higher deductibles on their auto insurance:
=+3. True or false? Explain your answer, stating what concept analyzed in this chapter accounts for the feature.
=+ Explain how this feature reduces the problem of moral hazard but also forces the contractor to bear more risk than she would like.
=+2. Acommon feature of home construction contracts is that when it costs more to construct a building than was originally estimated, the contractor must absorb the additional cost.
=+e. An increase in the risk affecting the economy as a whole £.A fall in the wealth levels of investors in the market
=+d. An increase in the degree of risk aversion among the investors in the market
=+c. An increase in the degree of risk aversion among the ship owners in the market
=+b. An increase in the number of trading routes, with the same number of ships traveling a greater variety of routes and so facing different kinds of risk
=+a. An increase in the number of ships traveling the same trade routes and so facing the same kinds of risks
=+1. Explain how each of the following events would change the equilibrium premium and quantity of insurance in the market, indicating any shifts in the supply and demand curves.
=+c. Would Karma be willing to pay some amount of money greater than zero for an insurance policy that guarantees her an income of $26,000? Explain.
=+ What does this imply about Karma’s attitudes toward risk? Explain.
=+b. What certain income level leaves her as well off as her uncertain income?
=+a. What is Karma’s expected income? Her expected utility?
=+The accompanying table shows some income and utility levels for Karma.
=+2. Karma’s income next year is uncertain: there is a 60% probability she will make $22,000 and a 40% probability she will make $35,000.
=+ Income Total utility (utils) $22,000 850 25,000 1,014 26,000 1,056 35,000 1,260
=+ Would either family be willing to buy an “unfair” insurance policy to cover losses to their Florida home?
=+Which family is likely to be more risk-averse—(i) a family with income of $2 million per year or (ii) a family with income of $60,000 per year?
=+1. Compare two families who own homes near the coast in Florida,
=+ + What is private information and what special problems does it pose for markets?
=+ + How do insurance markets lead to mutually beneficial trades of risk?
=+ how does it determine what they are willing to pay to reduce risk?
=++ Why does diminishing marginal utility make people risk averse ?
=+Why is risk a key feature of the economy?
=+c. Will Tamara work more or less than before the changes to the tax scheme? Why?
=+ Also illustrate her optimal choice. Bear in mind that she is equally as well off (on the same indifference curve) as before the tax changes occurred.
=+b. Draw Tamara’s new time allocation budget line on the same diagram.
=+optimal choice is on the same indifference curve as her initial optimal choice.
=+herself exactly equally as well off as before. That is, her new
=+government reduces the tax rate on all other income to 50%. That is, for all hours above the first 5 hours, Tamara’s net wage rate is now $io. After these changes, Tamara finds
=+‘The government changes the tax scheme. Now only the first $100 of income is tax- exempt. That is, for the first 5 hours she works, Tamara’s net wage rate is $20 per hour. But the
=+indifference curves have the usual shape.a, Draw Tamara’s time allocation budget line for a typical week. Also illustrate the indifference curve at her optimal choice.
=+the first £700 that Tamara makes, she pays no tax. That is, for the first 20 hours she works, her net wage—what she ‘takes home after taxes—is $20 per hour. On all income above $400, Tamara
=+5, Tamara has 80 hours per week that she can allocate to work or leisure. Her job pays a ‘wage rate of $20 per hour, but Tamara is being taxed on her income in the following way. On
=+c. Draw typical individual labor supply curves that illustrate your answers to part aand part b above.
=+b. Maddition to increasing wages, a study by the Bureau of Labor Statistics finds labor force participation for women is projected to steadily increase through 2024. For the average woman who has
=+a. Use the income and substitution effects to describe the labor supply for the average American. Which effect dominates?
=+4. Over the past fifty years the average American’ leisure time has increased by between 4 and 8 hours a week. Some economists think that this increase is primarily driven by a rise in wage rates.
=+b. Is Wendy’s behavior irrational, or can you find a rational explanation? Explain your answer.
=+a. Draw Wendy’s individual labor supply curve.
=+3. Wendy works at a fast-food restaurant. When her wage rate was $5 per hour, she worked 30 hours per week. When her wage rate rose to $6 per hour, she decided to work 40 hours. But when her wage
=+c. In your diagram, show the income effect and the substitution effect from this increase in the wage rate. Which effect is stronger?
=+b, Draw Florence’s new time allocation budget line, and illustrate the indifference curve at her optimal choice.
=+One of Florence’s clients is featured on the front page of Vague, an influential fashion magazine. As a result, Florence’s consulting fee now rises to $500 per hour. Florence decides to work
=+a. Draw Florence’s time allocation budget line for a typical day, and illustrate the indifference curve at her optimal choice.
=+2. Florence is a highly paid fashion consultant who earns $100 per hour. She has 16 hours per day that she can allocate to work or leisure, and she decides to work for 12 hours.
=+effect and the substitution effect from this reduced wage rate. Which effect is stronger?
=+d. Leandro’s decision to work less as the wage rate falls is the result of a substitution effect and an income effect. In your diagram, show the income
=+c. Suppose that Leandro now works only 4 hours as a result of his reduced wage rate. Illustrate the indifference curve at his new optimal choice.
=+b. Draw Leandro’s new budget line.
=+indifference curve at his optimal choice.Now Leandro’s wage rate falls to $10.
=+1, Leandro has 16 hours per day that he can allocate to work or leisure. His job pays a wage rate of $20. Leandro decides to consume 8 hours of leisure. His indifference curves have the usual
=+e. Use a diagram to determine how Paatty’s hiring decision responds to this increase in the productivity of her workforce.
=+. Calculate the new marginal product of labor and the new value of the marginal product of labor at the original price of $2 per pizza.
=+That is, the first worker now produces 18 pizzas per hour instead of 9, and so on.
=+ Now let’s assume that Patty buys a new high-tech pizza oven that allows her workers to become twice as productive as before.
=+ Use your diagram to determine how many workers Patty should employ now.
=+ Calculate the value of the marginal product of labor per worker, and draw the new value of the marginal product of labor curve in your diagram.
=+c. The price of pizza increases to $4.
=+b. Draw the value of the marginal product of labor curve. Use your diagram to determine how many workers Patty should employ.
=+b. The state income tax rate is increased, which has the effect of decreasing workers’ after-tax wage rate.c. The state property tax rate is increased, which reduces workers’ after-tax
=+a. The state income tax rate is lowered, which has the effect of increasing workers’ after-tax wage rate.
=+of income and substitution effects, and indicate when the impact of the policy may be ambiguous.
=+terms of income and substitution effects. 11. You are the governor’s economic policy adviser. The governor wants to put in place policies that encourage employed people to work more hours at
=+ 10. Greta is an enthusiastic amateur gardener and spends a lot of her free time working in her yard. She also has a demanding and well-paid job as a freelance advertising consultant. Because the
=+Are these reasons consistent with marginal productivity theory?
=+d. Unionized workers are generally better paid than non-unionized workers. g. Research consistently finds that despite nondiscrimination policies, African- American workers on average receive lower
=+c. Full professors command higher salaries than assistant professors for teaching the same class.
=+earn higher wages than airline pilots.b. College graduates usually have higher earnings in their first year on the job than workers without college degrees have in their first year on the job.
=+8. For each of the following situations in which similar workers are paid different wages, give the most likely explanation for these wage differences.a. Test pilots for new jet aircraft
=+three conditions must hold (involving her value of the marginal product of labor, land, and capital) for this to be true?
=+land. However, if she uses more land, she must use more of both labor and capital; if she uses less land, she can use less of both labor and capital. What 7

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