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.
NPV of L = $1.32 M; NPV of P = $1.454 M; P is better. In absolute payoffs instead: BAU = -$9 M; L = -$7.68 M ($1.32 M better than BAU); P = $7.546 M ($1.454 M better than BAU).
If the upgrade is done without the consulting firm: NPV of H = $13.272 M; NPV of L = -$7.276 M; EV = $5.033 M. If the agency hires the firm for $X and then chooses whether or not to upgrade based on its report, it would upgrade if H occurs and not upgrade if L occurs. The resulting EV = $7.963 M - X. Thus, the agency's WTP = $2.91 M.
If the installation is done immediately: NPV of B = $5 M; EV of N = -$4.658 M. If the city waits and then chooses based on whether or not T is available, it would use N if T occurs and B if it does not. The resulting EV = $6.411 M. Waiting is better.
(a) EV of federal policy = -$2B; EV of state policy = -$200 M. Neither adopts.
(b) EV to state with the federal policy in place = +$100 M (-$200 M + $300 M); state adopts. EV to federal government of offering the grant and then deciding whether or not to implement its own policy based on the outcome at the state level: $1.5 B; the federal government would offer the grant.
Q = 28; P = $700; profit = $920.
Q = 40; P = $5,000; profit = $160,000.
(a) EV = -$201 k; firm does not undertake it.
(b) PV of CS = $3.409 M; EV of CS = $681 k.
EV to the firm = $200 k; the firm would undertake the project. EV to the government = $280 k; the government would want to offer the policy.
Not required but worth noting: the net gains to the firm and the government are $480 k, which is exactly the sum of the expected CS ($681 k) and the firm's EV without the policy (-$201 k).