Self-EvaluationProblems

2-1.Suppose there are only two goods that Bob cares about(1) material welfare and

(2) leisure time that he "buys" from the outside world at $40 per unit and $20 per hour,re- spectively.He currently lives and works in Atlanta, has a budget totaling $1,000 per week for these two goods, and consumes 11 units of material welfare and 28 hours of leisure time.

1. ShowBob'sconsumptionchoiceonagraphusingtheactualbudgetlineandahypothet- ical indifference curve. (Label the axes and show the x and yintercepts.)
2. How will Bob's optimal consumption choice change if the government imposesa

$10/unit tax on the material welfare good?

1. Suppose Bob has a chance to move (at zero cost) to Saint Louis where material welfareand leisure time cost $50 and $10, respectively. His budget remains the same as before and the government has decided not to impose a tax on the material good. WouldBob move to Saint Louis? Why or why not?Explain.

2-2.Amiko 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 an expected value of $25,000 and a standard deviation of $10,000. This places her on an indifference curve with the following formula: Expected Value=$15,000+Standard Deviation

1. Is Amiko risk-averse?Explain.
2. WhatisAmiko's"certaintyequivalent"forhercurrentinvestment?Whatdoesthismean?
3. What is the risk premium on Amiko's currentinvestment?
   1. The city of Rochester is selling bonds at $90 per unit. The bonds pay $100 at the end ofone year when they mature (no other cashflows).

2-3.You have won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton? (a) $0, (b) $10, (c) $40, or (d) $50²⁵