The consumption of large cars such as SUVs produces three types of negative

externalities. Discuss them.

1 . People respond to incentives. Governments can alter incentives and, hence, behaviour with public policy. However, sometimes public policy generates unintended consequences by producing results that were not anticipated. Try to find an unintended consequence of each of the following public policies. a. To help the "working poor," the government raises the minimum wage to 625 per hour. b. To help the homeless, the government places rent controls on apartments restricting rent to 650 per month. C. To reduce its budget deficit and limit consumption of petrol, the government raises the tax on petrol by (1.00 per litre. d. To reduce the consumption of drugs, the government makes drugs illegal. e. To raise the population of a rare bird of prey, the government prohibits the killing of the birds and the collecting of their eggs. f. To improve the welfare of European sugar beet growers, the EU bans imports of sugar from South America. 2. Opportunity cost is what you give up to get an item. Since there is no such thing as a free lunch, what would likely be given up to obtain each of the items listed below? a. Susan can work full time or go to university. She chooses university. b. Susan can work full time or go to university. She chooses work. C. Farmer Jones has 100 hectares of land. He can plant wheat, which yields 5 tonnes per hectare, or he can plant potatoes, which yield 35 tonnes per hectare. He chooses to plant wheat. d. Farmer Jones has 100 hectares of land. He can plant wheat, which yields 5 tonnes per hectare, or he can plant potatoes, which yield 35 tonnes per hectare. He chooses to plant potatoes. e. In (a) and (b) above, and (c) and (d) above, which is the opportunity cost of which - college for work or work for college? Potatoes for wheat or wheat for potatoes?(9 points) AJZ Life's asset portfolio backing its single premium deferred annuity products have the following characteristics: The current average liability portfolio duration is the same as the current average asset portfolio duration (6.4 years). The current asset portfolio is comprised of 100% fixed income assets. (a) (3 points) Describe risks AJZ could face in a rapidly rising interest rate environment. (b) (3 points) Critique the following recommendation:(c) (3 points) Below is a subset of bond issuers that comprises AJZ's fixed income asset portfolio. Market Value in Average Issuer Rating Fixed Income Duration Par value Portfolio (millions) (in years) Airline public A 100 6.5 105 company Financial public AA 100 10 120 company Technology public BBB 100 110 company Other issuers Various 200 5 90 Total 500 The investment team foresees a downgrade of the technology public company from BBB to BB and has recommended a replacement issuer with average duration of 6.5 years which is sold at a 98% discount relative to the bond's par value. Calculate the amount of replacement bond to purchase without changing the duration profile of the asset portfolio. Show all work.(1 1 points) Company XYZ is offering a long-term care product with the following features: Elimination period: 100 days Original benefit amount: 3,000 per month . Compound inflation protection: 5% annual on original benefit amount (a) (2 points) Propose three product feature changes that would reduce payout variability from the base design. Justify each proposal. (b) (2 points) You are given: Present Value (PV) PV at 5% PV at 10% PV at 12% Premium 382.7 249.8 207.3 Pre-tax solvency earnings 35.2 29.5 24.7 Tax 14.1 11.8 9.9 Increase in required capital 8.6 12.3 15.9 After-tax investment income on assets backing required capital 1.5 1.2 1.1 XYZ's hurdle rate is set using a weighted average cost of capital method. XYZ's capital structure is 65% equity and 35% debt. . Stockholders demand a return of 13% after-tax. Pre-tax cost of debt is 7%. The return on investment for the asset backing the liability is 5%. Corporate tax rate is 40%. Calculate the following profit measures: (i) Embedded value (ii) Profit margin(c) (2 points) For each of the following sensitivity tests: . Morbidity decreases Mortality decreases . Lapses decrease . Interest rate drops (i) Describe the impact on profitability. (ii) Provide a realistic example that would lead to the above scenarios. (d) (2 points) Propose an approach XYZ can use to better understand the impact on profitability for combined changes in morbidity and interest assumptions. Justify your