Fall 2010 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

Net gain from switching: $568.  City should switch.  Not required (or necessary, if the calculation is done in terms of changes in cash flows): PV of conventional car = -27,466; hybrid = -26,898.

Question 2

Expected net payoffs: 1 large case = $50M; 2 small cases = $46M. One large case is better.

Question 3

Expected PV without the study: $4M.  Expected PV with study (EPV of the test): $11.5M.  Should order the test: ability to avoid $20M cost of failed policy more than offsets the reduced benefits due to the delay.

Question 4

PV of income = $160k; C0 = $96k; C1 = $80k; savings = $24k.

Question 5

P = $322, Q = 178, Profit = 0.

Question 6

Part A: P = $42; Q = 32; Profit = $1,024.

Part B: PV of profits = $12,761; NPV = $4,761. Firm would undertake the project.

Part C: Expected PV without the policy = -$1,619; with the policy = $250.  Policy would change the firm's decision from no to yes. Note that with the policy,each year TR = $600 and TC = $300 so profits = $300.