Part d

Suppose that a 5-year Treasury bond pays an annual rate of return of 1.3%, and a 5-year bond of the fictional company Risky Investment Inc. pays an annual rate of return of 7.1%. The risk premium on the Risky Investment bond is __________ percentage points.

Consider a decrease in the annual rate of return on the Risky Investment bond from 7.1 percent to 5.5 percent. Such a change would _________ the interest rate spread on the Risky Investment bond over Treasuries to ___________ .

Which of the following explains the decrease in the annual rate of return on the Risky Investment bond?

1. The expected default rate on the Risky Investment bond has decreased.

2.

7. Correcting for serial correlation with strictly exogenous regressors Consider the following standard multiple linear regression model with time series data: y, = e +31%; + +tx\"; +3; Assume that assumptions 15.1,1'52, T53, and EA all hold. Suppose that you believe that the errors {to} follow an AMI} model with parameter p, and so you apply the PraisWinsten method. If the errors do not follow an AR(1) modelforexampie, suppose they follow an AR(2) model, or an MA(1) modelwhich of the following explains why the usual PraisWinsoen standard errors will be incorrect? "_-\" The tlansforrned variables do not have serial correlation. The usual transformation will not fully eliminate the serial correlation in up The regression of the OLS residuals on a single lag consistently estimate the correlation ooeicient. Health Insurance Ch15 Suppose that an individual's demand curve for doctor visits per year is given by the equation P=100-250, where Q is the number of doctor's visits per year and P is the price per visit. Suppose also that the marginal cost of each doctor visit is $50 (a) How many visits per year would be efficient? What is the total cost of the efficient number of visits (b) Suppose that the individual obtains insurance. There is no deductible, and the coinsurance rate is 50%. How man visits to the doctor will occur now? What are the individual's out of pocket costs? How much does the insurance company pay for this individual's doctors' visits? (c) What is the deadweight loss (if any) caused by this insurance policy? (d) What happens to the size of the deadweight loss if it turns out that the marginal external benefit of visiting the doctor is $50