Exam 3 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

NPVs: ER = $7.0 M, CR = $11.0 M; CR is better.

Question 2

WTP for the firm = $2 M.

Question 3

NPV of BAU without the IRA = -$26.1 M; the firm would not build the facility. Expected PV of incentive P = $44.3 M; NPV of incentive I = $50 M; firm would prefer I. NPV of the project plus incentive I = $23.9 M so the firm would the facility. With no chance of repeal the NPV of incentive P is $62.3 M so the firm would prefer it.

Question 4

PV of costs: C = $271.6 M and R = $593.2 M. If the city builds R instead of C it avoids $20 M a year in damages. The PV of that over 40 years is $343.2 M. The cost premium of R over C is $321.6 M. Since the PV of avoided damages is larger than the difference in costs by $21.6 M, R is best.

Question 5

Q = 44, P = $1120, profit = $880.

Question 6

Q = 80, P = $8200, profit = $640,000.

Question 7

(a) PV of the monopoly profit = $7.98 M. EV of the research project = -$1 M. Firm would not undertake it.

(b) PV of CS = $13.64 M.

Question 8

Overall EV of the project to the firm is now $260,000. Since it's positive the firm would proceed. The government's EV is $785,000.