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.
NPVs: I = $14.02M, M = $14.01M. For all practical purposes, they are tied and equally good.
EVs: BAU = -$10M, P = -$7M ($3M gain from BAU), R = -$6M ($4M gain from BAU), P+R = -$5.7M ($4.3M gain from BAU). For a small budget R is best; for a larger budget, P+R is slightly better but only a little: the reduced probabilities are less important with smaller damages.
Location G NPV = $13.9M; location D expected NPV without the test = $9.9M; EV of the test = $22.1M less the price of the test; maximum WTP for the test = $22.1M - $13.9M = $8.2M.
(a) PV of benefits under MS = $75.4B ; market-only expected NPV = $22.6B.
(b) PV cost of P = $12.5B; PV benefits under PH = $99.1B; PV benefits under PM = $75.4B; expected NPV of policy P = $37.5B; yes, the government should undertake it. Decomposing the extra benefits (setting aside the extra cost): expected early benefits = 0.2*$23.7B = $4.74B; increased likelihood of later benefits (probability of PH plus PM less the original probability) = (0.2+0.4-0.3)*$75.4B = $22.6B. The second effect, the increased long term probability, is most important.
Q = 25, P = $1500, profit = $1250.
Q = 47, P = $9600, profit = $441.8k.
(a) NPV of monopoly profit = $5.5M; NPV of current salary = $1.87M; NPV of lower salary = $747.7k. EV of project = $1.94M; would go ahead with the project.
(b) PV of CS = $9.41M. The part during the monopoly period is $2.75M and the part after it is $6.66M so the post-patent period is more important. The CS in each year is four times that during the patent period, plus it continues indefinitely. Together, those are more than enough to offset the delay.
EU from the project without the policy= 1235; EU from salary = 1367; won't do the project on her own. With the policy, EU from the project = 1399; will now develop it.