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

NPV of A = $349 M; NPV of B = -$62 M; overall NPV = $287 M; city should proceed.

Question 2

EV of BAU = -$10 M, EV of V = -$9 M, EV of B = -$8 M; option B is best.

Question 3

EV of BAU = $25 M, EV of R = $20 M, EV of T = $30 M. Policy T is best.

Question 4

NPV of C = $91 M, ENPV of M = $46.4 M, ENPV of T is -x + $111 M. WTP is $20 M.

Question 5

Q= 166, P = $3340, profit = $2320.

Question 6

Q = 50, P = $10,100, profit = $500,000.

Question 7

(a) PV of monopoly profit = $6.23 M; ENPV of the project = -$366 k; do not undertake.

(b) Per year during patent period: CS = $250 k, EXT = $100 k, total = $350 k. Per year after the patent period: CS = $1 M, EXT = $200 k, total = $1.2 M; PV of CS and EXT = $13.407 M.

Question 8

Firm's ENPV becomes $234 k and it would undertake the project. Government's expected payoff  = $1.41 M. Minimum prize to induce firm to do the project = $2.44 M.