Fall 2013 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 of T = $1059 M, NPV of U = $689 M.  T is best. 

Question 2

New Q if elasticity is -0.2 = 96K; new Q if elasticity is -2.0 = 60k; EV of tax revenue = $1.56M; EV of DWL = $220K.

Question 3

ENPV = -$87M.  The city should not go ahead.

Question 4

Payoff if the city hires the firm and the firm reports benefits would be high: $52M-X (cost of study); payoff if the firm reports benefits would be low: -X.  Maximum WTP for the study: $10.4M.

Question 5

Q = 30; P = $170; profit = $100.

Question 6

Q = 22; P = $210; profit = $2420.

Question 7

ENPV = -$4970; firm would not do the project.

Question 8

(a) PV of CS during patent: $15,079; PV of CS after the patent expires: $36,483; expected CS overall: $10,312.

(b) ENPV to the firm: $1030; firm would now do the project.  Expected gain in SS (profit plus CS less $8k): $5342.  Project is efficient since the expected gain is positive.  

A short cut for the efficiency test is to compute the expected PV of CS less the $6000 subsidy, which is $4312, indicating that the gain in CS alone makes the subsidy worthwhile.  The expected CS gain of $4312 plus the expected NPV to the firm of $1030 equals the expected gain in SS of $5342.