Fall 2009 Final Exam 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

NPV is 3.86 million. City should replace the bridge because the total cost will be lower than the cost of continuing to maintain the current bridge.

Question 2

Expected NPV is $794k.  Good idea to adopt the system: the expected present value gains are large enough to justify the risk that it will be rejected.

Question 3

The EV of the pilot study is $30k.  Without the study, it would be a good idea to implement the project anyway but the EV in that case is only $20k.  Doing the pilot study thus increases the payoff by $10k.

Question 4

K=76, L=150.93, AC=37.8.

Question 5

P=36, Q=57, profit = 2.

Question 6

Part A: P=1000, Q=20, profit=20k.

Part B: PV of monopoly profit = 249k. EV of project = 30k.

Part C: Payment to the firm = 249k (year 0 value from part B); net gain per year is $10k (elimination of DWL) and NPV gain is $125k. (Equivalently: a gross gain in CS of $374k less the $249k expenditure on the patent.)