Spring 2011 Exam 1 Solution

Here are the final numerical results for each section of the exam.  You can use them to check your work if you do the exam for practice.  If you have trouble with the problems, or don't get the answers shown here, stop by during office hours or make and appointment and we can go over them.

Question 1

(1) C=56; D=84; U=68.59; Revenue=280.

(2) C=70; D=70; U=70; since U is larger, the household is better off; Revenue=280, which matches the old system.

(3) Expenditure needed to achieve new U at old prices=1714.6 so the EV=34.64.

(4) $28.

(5) Net gain = $34.64+$28 = $62.64.  This is an example of a "double dividend": the policy improves the efficiency of the tax system as well as reducing the externality.  Note that improving the tax system would be desirable even without the externality.

Question 2

(1) EV=$200K; would undertake it; net gain=$100K.

(2) EU of the project=44.72; EU of salary=316.23; agent would strongly prefer original job.

(3) EU of the contract=325.44; agent would accept; CE=$105,913; EV of gain to VC=$30K.

Question 3

(1) NPV under LW case=$54.5 million; NPV under HW case= -$33.2 million.

The interesting point here is that the implied elasticity of demand for renewable power causes the counterintuitive result that high wind is actually bad.  In this example, the price of electricity drops by more than enough to offset the increase in output, and revenue actually falls.

(2) Expected NPV=10.6 million.

Question 4

(1) NPV of renovating immediately=$200K and expected NPV of renovating in year 5=$235K: better to wait. The gain is $35,057.