\fSECTION 1: SHORT QUESTIONS (7*8=56 points) 1. Consider the following cost function: TC=720+12q+12q where TC is total cost of production and q is quantity produced. Please identify the average fixed cost, the average variable cost and the marginal cost. Consider the following cost function: TC=4800+2q where TC is total cost of production and q is quantity produced. Assume the price to be $50. What is the \"Break-even quantity\" for the firm? What does this number mean? . You are indifferent (derive the same utility) between the following investments: An investment with a sure return of 100 $ . An investment with an expected outcome of 400$ and standard deviation of 80$ & An investment with an expected outcome of 700$ and standard deviation of 160$ If you drew an indifference curve between risk and return, how would it look like? What does it say about the nature of your risk aversion? 4. Consider two parties in a trading relationship when neither party has comparative advantage. Does this mean neither have absolute advantage? Explain clearly with numerical examples. When is price elasticity of demand positive? Explain with an example. The effect of increasing minimum wage on the labor market (unemployment and job loss numbers) are largely dependent on the nature of the supply and demand in the labor market, as well as the nature of elasticities in the product market (of the product that the firm produces). Explain in details the conditions under which an increase in minimum wage will have minimum impact on unemployment. We have seen that the price elasticities of supply and demand determine how a tax imposed on a producer impacts the market. Explain clearly when this tax causes a large deadweight loss. SECTION 2: ESSAY QUESTIONS QUESTION 1 (24 points) Walter has an offer for a one-year long consulting position which will pay him $200,000 after the project has been completed. The contract cannot be renewed. If he takes the consulting job he will have to move to a different part of town as it will be too far for him to commute. This relocation will cost him $8000 for which he will not be compensated. On the other hand, he has an offer from a friend to be partner in a real estate project. The project will require an initial investment of $500,000 from each partner (Walter and his friend are the only partners). The resale value of the project is expected to be $1.4 million after one year. Walter has $300,000 saved and gets a return of 2% on his savings per year. He can liquidate this investment any time but has to pay a fixed penalty of $2000. He has talked to his bank and he will be able to borrow $200,000, guaranteed by the property, for 7% per annum. Walter needs to choose between the two offers (he cannot do both projects simultaneously). a. Please calculate the economic profit of the real estate project. b. Please calculate the economic profit of consulting project. a. We do not include Walter's living costs (food, rent etc.) in the economic profit calculation. Explain why. QUESTION 2 (12+8=20 points) Just like the Big Mac Index, the Starbucks index has attempted to predict if a currency is undervalued or overvalued by comparing the latte prices and the actual exchange rates between countries. Take the following observations: Country Starbucks tall latte Actual exchange rate Price USD (units of local currency that exchanges for 1 USD) US 4.30 Belgium 4.3 0.85 Australia 3.09 1.40 Canada 3.15 1.31 Source: https://www.finder.com/starbucks-index a. Based on these observations, please verify which of the currencies are overvalued and which are undervalued relative to the USD. Find the PPP exchange rate for Australia. b. Referring to the HBS reading "The note on Exchange rate Determination", explain the relationship between inflation and the exchange rate in the long run clearly. 4