2-16.Critically evaluate the following statement: "Risk-averse people never take gambles."

2-17.Suppose that an investment can yield three possible cash flows: $5,000; $1,000; or $0. The probability of each outcome is 1/3.

1. What is the expected value and standard deviation of theinvestment?
2. How much would a risk-neutral person be willing to pay for theinvestment?
3. How much would a risk-averse person be willing to pay for theinvestment?

2-18. In order to spur consumer spending in 1998, the Japanese governmentconsidered an $85 bil- lion vouchersystem whereby everyJapanese consumer would receivea shopping voucherthat could be used to purchase Japanese products. For simplicity,assume the following:Each consumer has wealth of 1 million yen, consumers must allocate this wealth between con- sumption now(c₁) and consumption later (c₂), the interest rate is zero, the voucheris worth100,000 yen, and it can be spent only in the current period. If it is not spent, it is lost.

1. Plot a budget line for a representative consumer both before and after the voucher pro-gram (c₁ and c₂ are on theaxes).
2. Do you expect that current consumption of a typical consumer will increase by the full100,000 yen of the voucher?Explain.
3. How does the impact of this 100,000-yen voucher differ from simply giving the individ-ual 100,000 yen?

2-19.People give to charity.

1. Is this action consistent with the "economic view of behavior"?Explain.
2. Suppose there is a big drop in charitable giving. At the same time there has been no de- cline in per capita income or total employment. Using the economic model, what poten-tial factors might have led to this decline ingiving?
3. Howmightthedeclineingivingbeexplainedbytheproduct-of-theenvironmentmodel?

2-20. The Japanese are very good at returning lost property to local police stations. If you lose a wallet filled with cash in Japan it is likely to be turned into the police. This is true even though the person finding it could keep it without anyone else knowing. This behavior isnotwhat you would find in New YorkCity.

1. Does this observation about Japan imply that the economic model does not explain be-havior in Japan?Explain.
2. Police stations in Japan are filled with lost umbrellas. It used to be that the typical Japanese would make a trip to the local police station to search for a lost umbrella. Nowthey don't. Explain this behavior using the EconomicModel.
3. Do you think that the typical Japanese is more likely to come to a police station to finda lost cell phone or a lost umbrella? Explain using the Economic Model.

2-21.SomestatesintheUnitedStatesallowcitizenstocarryhandguns.Citizenscanprotectthem- selvesinthecaseofrobberiesbyusingtheseguns.Otherstatesdonotallowcitizenstocarry handguns.Criminals,however,tendtohavehandgunsinallstates.Useeconomicanalysisto predicttheeffectsofhandgunlawsonthebehaviorofthetypicalcriminal.Inparticular:

1. Do you think criminals will commit more or fewer robberies in the states with thelaws?
2. How do you think the laws will affect the types of robberiescriminals commit? Be sureto explain your economicreasoning.

2-22. Discuss the following statement: "Sunk costs matter. People who pay $20,000 to join a golf club play golf more frequently than people who play on public golf courses."

2-23. Jenny is an investor in the stock market. She cares about both the expected value and stan- dard deviation of her investment. Currently she is invested in a security that has anexpectedvalue of $15,000 and a standard deviation of $5,000. This places her on an indifference curve with the following formula: Expected Value =$10,000+StandardDeviation.

1. Is Jenny risk averse?Explain.
2. WhatisJenny's"certaintyequivalent"forhercurrentinvestment?Whatdoesthismean?
3. What is the risk premium on her currentinvestment?

2-24. Accounting problems at Enron ultimately led to the collapse of the large accounting firm ArthurAndersen.WhentheEnronscandalfirstbecamepublic,Andersen'stopmanagement blamed one "rogue partner" in the Houston office who they claimed was less honest than other partners at the firm. They fired the partner and asked that people not hold the remain- ingpartnersaccountablefor"onebadapple."WhatmodelofbehaviorwasAndersen'sman-agement using when it analyzed the source of the problem? According to the economic view of behavior, what was the more likely cause of theproblem?

2-25. According to a recent article in The Atlanta Journal-Constitution(January 29, 2004), "ma- terialism, not necessity, gave birth to dual-income families." In supporting the argument, the author cites the following figures from the Department of Commerce: In 1970 the average wage per job was $6,900, which in 2001 dollars (adjusting for inflation) amounts to

$31,500. In 2001, the average wage per job was $35,500. The main thesis of the article is that dual-income families are a result of a shift in consumer preferences towardconsump- tion as opposed to leisure time/time spent with thefamily.

1. Assume the average person worked 250 days during a year both in 1970 and 2001, and that, as reported in the article, only one person worked in the average family in 1970, while both parents did in 2001. Provide a graphical analysis of the typical family's choice between family income and combined parent leisure time that supports the au- thor's argument, relying on the tools presented in class. Be careful in labeling your graph(s), and provide a clear and concise explanation for your graph(s). Note that there are 365 days in a year so that the total parent leisure time that is possible is 730 days (assuming neither spouse works). Assume it is possible for each family member to workanywhere from 0 to 365 days a year (at the going salary rate) if they choose to doso.
2. Assume that in 1971 the average single person worked 220 days per year, while the same person worked 260 days per year in 2001. Moreover, suppose the average daily wage in 2001 dollars was $125 in 1970 and $140 in 2001. Show graphically how the au-thor's argument would not necessarily apply to the average single person (i.e., assume preferences are unchanged). Explain clearly and concisely why the average worker may be choosing to work more in 2001 and carefully label yourgraph.

2-26. Russell and Joe have hired Maria to help cook in their restaurant. Maria had previously owned her own breakfast business. Her speed in cooking was well-known. Russell and Joe have been surprised that her productivity has fallen significantly since she became their paid employee. Use the economic view of behavior and marginal analysis to provide a potential explanation for Maria's reduced productivity.

2-27. Michael is a fan of the Rhinosthe local professional soccer team. At the beginning of the season, he purchased nonrefundable season tickets to their 10 home games for a total of

$100. Michael places equal value on each of the home games. His value for any given game is independent of how many other games he attended during the year. Michael would be willing to stay at home, which he derives no benefit from, and miss an individual game, if he could sell the ticket for one game for $20 or more.

Michael has attended three out of the last five home games. The sixth home game of the season is tomorrow night. Michael's friend Fred has offered to sell him an extra ticket to a sold-out concert for $50 that happens to be on the same night as the game. Normally, Michael would be willing to pay $70 to attend the concert. There is no way that Michael can attend both the Rhinos' game and the concert. Looking online, Michael finds that he can sell his ticket for tomorrow night's Rhinos' game for $5.

1. Whattype/typesofcostisthe$100thatMichaelpaidfortheseasontickets?Explainwhy.
2. Which event will Michael decide to attend? Explainwhy.
3. How much would Fred have to charge Michael for the concert ticket in order tomakeMichael not care which event he attended? Explainwhy.

2-28.An entrepreneur quits his job as a banker and invests $100,000 of his savings in a new busi- ness venture that he will manage. Discuss the two most obvious opportunity costs that he will incur from this decision.

2-29.In one hour, John can assemble either 20 telephones or 10 answering machines. It takes Sally two hours to assemble either 20 telephones or 10 answering machines. Does either person have an absolute advantage in assembling either product? What about acompetitive advantage? Explain (make sure you define absolute and competitive advantage andprovide the opportunity costs for each person). Draw the combined production possibilities curve for the two people assuming that they work eight hours. Put answering machines on the horizontal axis.

2-30.Youare trying to decide whether to fly or drive from Rochester to Boston during your sum- mer visit. The trip is approximately 400 miles. Youcan purchase a round-trip nonstop flightfor $230. The duration of each flight is 3.5 hours (seven hours in total). If you drive, it will take you approximately seven hours each way (14 hours in total). Yourcar gets 32 miles to the gallon and you expect gas will cost $3/gal. Tollsare $15 each way.Youvalue your time at $15 perhour.

1. Calculate the total cost of driving to Boston andback.
2. Under these conditions, will you drive orfly?
3. What if you value your time at $20, rather than $15, perhour?
4. You are offered a deal for $180 total airfare if you take a flight with a one hour layover in NYC (total flying time does not change). Do you take the deal? Will this change your flying versus driving decision? (Use the $15 per hour value of time in the calculation.)
5. What are some other costs you may want to consider in thisanalysis?
6. If you were expecting a snow storm, how might this change your analysis? Whataresome other costs you may want to take intoconsideration?

2-31. The school is having a happy hour on Friday. If you go, you will get two free drink tickets and snacks, for which you would normally pay $15. However, you will have to pay $10 for the cab fare home. You also have a free student ticket to the local profession team's soccer game. There is no resale value, as free tickets are still available.

1. What is the opportunity cost of going to the soccer game?
2. If you would not normally pay to go to the soccer game, which will youchoose?