The Maxwell School
Syracuse University
Syracuse University
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.
(a) Market equilibrium: Q=10,000, P=100; efficient Q = 8,000.
(b) T=$40.
(a) NPVs: BACT=$467 thousand; ALT=$1.316 million. A risk neutral firm would choose ALT.
(b) BACT NPV with no risk of a fine: $1.239 million. It's still not as good as ALT, although it's closer.
(c) Expected utility of BACT with no risk of a fine=1113; expected utility of ALT=1092. The firm would choose BACT. The decision is highly inefficient since ALT has a much higher EV when fines aren't biased. The CE for ALT is $1.191 million. Since the EV for ALT is $1.316 million, the risk premium (not a required part of the problem) associated with it is $125 thousand.
Question 3
(a) NPV to homeowner=-$6090.
(b) NPV to the city=$3600.
(c) PV of PACE payments before deducting construction=$12,766, which does cover the construction cost; NPV=$366. NPV to the city including the environmental benefits=$1374.
(d) Homeowner's gain per year=$99. NPV to the homeowner=$937 so the homeowner would want to proceed.
(a) NPV of type C=$105.9 million. Expected NPV of type A=$308.0 million. Plant A is best.
(b) Expected NPV of waiting and building the appropriate plant at 5=$320.4 million. Waiting is better than building plant A right away. Even though the firm forgoes 5 years of profits, it avoids the costly mistake of building A when its reliability is low.