Fall 2017 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 M= $2.88 million; NPV of S= $1.66 million; M is best. Alternatively, gross cost of BAU= $15 million; gross cost of M= $12.12 million; gross cost of S= $13.34 million; M is best and a gain of $2.88 million over BAU.

Question 2

The city's WTP= $20k. Some intermediate results: EV of damage without a test or renovation= -$70k; cost of renovation without a test= $150k; without a test, it's better not to renovate; EV of conducting the test if the price of the test is X= -$50k - X.

Question 3

NPV of N buses at time 0= $4.347 million; NPV of E buses at time 0= $3.578 million; if the city acts at 0, N is better; NPV of waiting until 5 and then deciding= $4.574 million; waiting and deciding is best.

Question 4

(a) EV of incarceration= -$375k; EV of probation= -$125k; probation will be used; 0 incorrect decisions for N defendants; 25 R defendents given probation rather than incarceration.

(b) EV of using the test= -$92.5k; the courts will use the test; expected incorrect decisions: 15 N defendants incarcerated instead of given probation; 2.5 R defendants given probation rather than incarceration. The system sharply reduces the number of incorrect decisions on R defendants (which produces a significant gain relative to the previous situation) but at the cost of incarcerating a large number of N defendants.

Question 5

Q= 17; P= $390; profit = $350.

Question 6

Q= 18; P= $2000; profit= $32,400.

Question 7

(a) ENPV = -$259.6k; the firm would not undertake the project.

(b) Annual CS during the patent period= $16.2k; annual external benefit during the patent period= $90k; PV of both benefits during the patent period= $1.324 million. Q after the patent period= 36; annual CS after the patent= $64.8k; annual external benefit after the patent= $180k; PV of both benefits after the patent= $1.845 million; total PV of CS and external benefits = $3.169 million; EV= $317k.

Question 8

EV = -$42k; the firm would not do the project.