Some microeconomic questions have been given below, provide answers for these
(b) (4 minutes) Calculate consumer and producer surplus under trade. (5) (15 minutes) The US government is unhappy with steel imports and decides to impose a 200 percent tariff on imported steel so that the price of imported steel is now 3 when importing from abroad. (Continue to assume that the US domestic steel market operates in perfect competition with production function S(L) = $1) (a) (2 minutes) What is the price of domestic steel? Will car manufacturers choose to use domestic or foreign steel? (b) (5 minutes) Calculate the new equilibrium in the US market for cars, continuing to assume that cars are traded freely at a world price of 100. Does the US still export cars? 3. Bergson becomes a benevolent dictator. He has a subjects . = 1, .. .,n with CARA utilities #1,.., Un, respectively. (Write o, for the absolute risk aversion of i.) The total wealth in the society, Y, is a function of an unknown state @ and is normally distributed with mean / and variance of. Bergson can choose any allocation ? = (21, ...;2,) such that an (@) +... +a, (w) 1 from her savings so that her wealth at t + 1 is with = " (wt - ; ) if her wealth at t is we and she consumes r, at t. (b) Find a sophisticated-optimal consumption strategy for her in which the self at any given date s consumes yu's. Compute the constant y and briefly verify that this is indeed a subgame-perfect equilibrium of the multi-agent game. (c) For 8 0. With some probability # 6 (0. 1) she may get sick, in which case she would need to spend L dollars on her health. There is a health-insurance policy that fully covers her health care expenses in case of sickness and costs P to her. (If she buys the policy, she needs to pay P regardless of whether she gets sick.) (a) Find the set of prices P that she is willing to pay for the policy. How does the maximum price P she is willing to pay varies with the parameters M, L. o, and ? (b) Suppose now that there is a test te {-1, +1} that she can take before she makes her decision on buying the insurance policy. If she takes the test and the test t is positive, her posterior probability of getting sick jumps to a* > > and if the test is negative, then her posterior probability of getting sick becomes 0. What is the maximum price c she is willing to pay in order to take the test? (Take P 160 The minimum level of income possible in this economy is 60. Each agent is about to choose a new business venture, and has a choice between project A and project B. Neither project requires any investment up front. Project A yields revenues of 20 with probability = and revenues of -10 with probability -. Project B yields revenues of 4 with probability one-half and revenues of 5 with probability one-half. Throughout this problem, assume that fractional income is possible. (a) (5 points) Which project would each agent choose? Provide intuition for your answer. (b) (5 points ) If Bill and Bob each choose an investment project each year and receive the associated income for 20 years, will the expected gap in their incomes be larger or smaller at the end of this period than it was initially ? How does this relate to attitudes toward risk? You do not need to calculate income over 20 years, just provide intuition. (c) (10 points) Now, assume that there is a job available that provides fixed wage income. What salary would the job have to provide in order to induce Bill to take the job rather than entering a new business venture? What salary would the job have to provide in order to induce Bob to take the job? Which is higher, and why? Algebraic expressions are acceptable as answers
