Answer all economics questions given below

Question: On June 21st General Electric announced that they would have a 1 for 8 reverse stock split for shareholders of record July 30th. The stock would begin trading post split on August 2nd. One Month earlier on May 24th later Nvidia announced their own stock split, 4 for 1, for the record date of June 21st. Nvidia stock price rose over 18% between the announcement and the effective date. General Electric stock fell 1.8% between the announcement and the effective date. For comparison, the S&P 500 was flat from May 24 to June 21 and then up 4.3% from June 21 to July 30. The Nasdaq 100 ETF was up 3.6% for the first part of the time frame and 5.8% for the latter part of the period. From this information and what we discussed in class, both from the notes and pre-class discussions, is there justification for these stocks to make the moves they did following the announcement up to the record date? What would you expect the price action in these stocks to have been? What explanation(s) can you offer for these moves (they do not have to be the same for both stocks)?

2. "(From McAfee 1996) In May 1990, IBM announced the introduction of the LaserPrinter E, a lower cost alternative to its popular LaserPrinter. The LaserPrinter E was identical to the original Laser Printer except that it printed at 5 ppm instead of 10 ppm. According to Jones(1990), the engine and parts of the printer were virtually identical to the faster printer except that the controller for the slower printer had firmwear that inserted wait states to slow the print speed of the printer. This problem is designed to see how such damaging of a product may make everyone better off. (a) Assume first that you have a single high quality product that you are selling. The product has constant marginal cost to produce of $1. There are two types of consumers who are willing to buy a single unit of your good. 25% of the population is type 1 and are willing to buy your product if the cost of producing it is less than or equal to $11. 75% of the population is type 2 and are willing to buy your product 2 if it is priced at $3.00. Suppose that you must sell your product at a constant price (you can not screen your consumers) - show that you will only sell to the high types. (b) Now assume that you can produce a broken version of your product. Let s be a measure of how broken your product is. The high types get utility Up(x,,s) for consuming one unit of type s good. Thus Un(1, 0) is the value to the high type of buying one unit of the original quality good and Up (1, s) would be the utility of the high type for buying a good with quality s. Similarly, the low type get Uz(1,0) for the original good and Up (1, s) for consuming a low good of value s. Assume that a 0 (it is costly to produce an inferior good). i. Again assume that there is no screening other than offering a low quality good. Set up the monopolists problem. ii. Suppose that Un (1, a) = 11 -26, UL(1, a) =3-.250, and c(s) = 1. Find the optimal quality of the lower good and the amount charged for the two goods. ili. Suppose by law the monopolist can only reduce quality down to s = 3. Show that in this case, everyone is at least as well off due to the creation of the damaged good. 3. Suppose that a hospital carries K doses of an opium based medicine used to help patients suffering from micro fibralgia. N 2 K patients come seeking the drug at the same time. 6 of these actually suffer from the disease while N-6 of them are drug addicts looking for a fix. (a) Suppose that the hospital does not care about the utility of the drug addicts. The utility of a micro fiberalgia agent receiving the drug is 10. The utility of a micro fibralgia agent who does not receive the drug is zero. Calculate the total expected utility the hospital can provide to its micro fibralgia patients if it has no way to screen between drug addicts and true patients. (b) Suppose that the Hospital can force agents to waste time before being treated. The utility of a micro fibralgia user who must wait and receives the medication with probability p is: UMicro(w, p) = 10p - 2w Drug addicts have a utility function of UDA(w,P) =4-w The addicts are not rational - as long as they stay in the hospital they believe that the probability of receiving treatment is 1. Both agents outside option is zero, that is UMiers(0,0) = UpA (0,0) =0.\f11. Professor Schipper cannot compute the Hiclrsian demand using KuhnTucker with out a coffee. Unfortunately, Ali has no coffee to olfer. Yet, he could offer Professor Schipper his expenditure function. Is there a way to quickly calculate the Hicksian demand from the expenditure function without coffee? 5. 1'Iu'rerify the {own price} Slutslry equation for the example of almonds. In. Which term in the {own price]I Slutslcy equation refers to the substitution elfect? As mentioned previously, we don't really know whether Ali has a Cobb-Douglas utility function. Suppose Ali has a continuous utility Function representing locally nonsatiated preferences and that his Hicksian demand function is indeed a function {rather than a correspondence}. Would a change in prices still have qualitatively the same effect on Hicksian demand as when he has the above Cobb-Douglas utility function? If yes, provide a short proof. If not, argue why not. n. Because of the drought, the price of almonds changes from 192 to pi. UC Davis is committed to keep Ali as well olf as before the price change. The newly hired Senior 1|In'rice Provost for lCrocodile Welfare turns to Professor Schipper for advice on the exact amount to be deducted from the budget of the university and paid to Ali as compensation for the price change. Unfortunately, Professor Schipper is so immersed in exciting new research that he is extremely slow in answering his email. Lucltily1 the Senior Vice Provost for Crocodile Welfare spends most of his time in the hammocks on the quad, where he meets you studying for the prelims. Help him calculate the amount. (d) Suppose that, as a matter of fact, the enemy position is & so that Player 1 at 6:00am of Day 1 sends the notification to Player 2. How many messages need to be successfully exchanged between the two players for it to become common knowledge that the enemy position is L? [continues on the next page] Page 6 of 7 Let the von Neumann-Morgenstern payoffs be as follows (4 means "Attack" and / means "Do Not attack"), where c > 0. If enemy position is _ If enemy position is H Player 2 Player 2 A N A N 1+c 0 C I+c C Player 1 Player 1 N N For the following questions, suppose that on Day 0 the players agree to follow this strategy, call it strategy s, : if a player knows that a total of at least & messages were sent (with k > 0 ), then that player will attack, otherwise she/he will not attack. (e) Suppose that c =2. Are there values of & such that it is in the interest of each player to follow strategy s, if she trusts that the other player will follow strategy s, ? Explain [Hints: (1) you need to use Bayes' rule to obtain posterior beliefs; (2) consider first the case where k is odd and then the case where * is even.]