Fall 2020 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

Program C is best with PVI=$87k; `C_0`=29k; `C_1`=72.5k; borrows=$35k; figure:

Question 2

NPV at 5%=-$1.266 M, don't go ahead; NPV at 2% = 9.221 M, do go ahead; `Delta PV_B`=$11.549 M; `Delta PV_C`=+$1.009 M; both go up but the change in `PV_B` is much larger: the costs end pretty quickly and the infinite stream of benefits is much harder to reproduce with a financial asset if the interest rate is very low.

Question 3

Net payoff from S without testing = $8; expected net payoff from N without testing = $1; expected net payoff from testing when the cost of the test is X=$10-X; maximum value of X=$2.

Question 4

Q=20; P=$300; profit=0.

Question 5

Q=60; P=$3005; profit=$180k.

Question 6

(a) PV of monopoly profit if the project succeeds=$2.243M; EV of the project=-$502k; firm would not undertake the project.

(b) PV of CS during the monopoly=$1.122M; PV of CS after the monopoly=$2.714M; total PV of CS=$3.836M; expected PV of CS=$1.534M.

Question 7

New profit to the firm if it succeeds=$4.486M; new EV of the project=$394k; firm would go ahead with the project. Government's annual payments if the project succeeds=60*$3005=$180,300; PV of payments=$2.247M (slightly more than the monopoly profit); net payoff if the project succeeds=$1.589M; EV=636k.

Extra credit: Q consumed would rise to 120, which is efficient because that's where WTP=MC. The welfare changes would be: `\Delta CS`=+$90k; `\Delta PS`=$180k; `\Delta Rev`=-$180.3k (to firm) + $300 (from buyers) =-$180k so `\Delta SS`=+$90k.