Answered: A risk-neutral consumer is deciding…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Problem 12-05 (Algo)

A
risk-neutral consumer is deciding whether to purchase a homogeneous product
from one of two firms One firm produces an unreliable product and the other
a reliable product At the time of the sale, the consumer is unable to distinguish
between the two firmsâ€™ products From the consumerâ€™s perspective, there is an
equal chance that a given firmâ€™s product is reliable or unreliable The
maximum amount this consumer will pay for an unreliable product is $0, while
she will pay $210 for a reliable product

a	Given this uncertainty, what is the most this consumer will pay to purchase one unit of this product?

b	How much will this consumer be willing to pay for the product if the firm offering the reliable product includes a warranty that will protect the consumer?

Problem 12-04

You
are the manager of a firm that sells a â€œcommodityâ€ in a market that resembles
perfect competition, and your cost function is C(Q) = 2Q
+ 3Q² Unfortunately, due to production lags, you must make
your output decision prior to knowing for certain the price that will prevail
in the market You believe that there is a 70 percent chance the market price
will be $200 and a 30 percent chance it will be $600

a	Calculate the expected market price

b	What output should you produce in order to maximize expected profits?

units

c	What are your expected profits?

$ It is not -1113 in expected profits A and b are correct

rev: 06_11_2013_Q

Problem 12-18 (Algo)

Pelican
Point Financial Groupâ€™s clientele consists of two types of investors The
first type of investor makes many transactions in a given year and has a net
worth of over $1 million These investors seek unlimited access to investment
consultants and are willing to pay up to $30,000 annually for no-fee-based
transactions, or alternatively, $30 per trade The other type of investor
also has a net worth of over $1 million but makes few transactions each year
and therefore is willing to pay $115 per trade

As
the manager of Pelican Point Financial Group, you are unable to determine
whether any given individual is a high- or low-volume transaction investor
To deal with this issue, you design a self-selection mechanism that permits
you to identify each type of investor You offer two types of plans for
customers with more than $1 million in assets: one plan has an annual
maintenance fee but offers a large number of “free” transactions
(call this the “Free Trade” Account); the other plan has no annual
maintenance fee but charges for each transaction (call this the “Free
Service” Account) Determine the specifics for each plan as listed
below:

“Free Trade” Account:

Annual maintenance fee

Number of
“free” transactions

Price for each
transaction in excess of the number of “free” transactions

“Free Service”
Account:

Price per transaction

rev: 06_11_2013_QC_31456

Problem 12-12

As
the manager of Smith Construction, you need to make a decision on the number
of homes to build in a new residential area where you are the only builder
Unfortunately, you must build the homes before you learn how strong demand is
for homes in this large neighborhood There is a 60 percent chance of low
demand and a 40 percent chance of high demand The corresponding (inverse)
demand functions for these two scenarios are P = 300,000 â€“ 400Q
and P = 500,000 â€“ 275Q, respectively Your cost function is C(Q)
= 140,000 + 240,000Q

How many new homes should you build, and what profits can you expect?

Number of homes you should build:

homes

Profits you can expect:

$200 is
right, however, 13, 8600 is wrong for profits

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