Microeconomics Answers

Suppose that earning a college degree will increase your annual salary by $24,000.00. If you have just finished this degree and plan on working for the next 44.00 years before retiring, what is the present value of what the degree will earn you across your entire career? Assume a market interest rate of 8.00%. Round your answer to two decimals.

Suppose that today an asset is worth $169.00, but that next year you expect the price of this asset to be exactly the same. In present value, how much is it worth to you to wait and buy the asset next year when the interest rate is 6.00% this year?

Publicity agents for the Detroit Felines announce the signing of a new second-string quarterback, Archie Parabola. They say that the contract is worth $1,000,000 and will be paid in 20 installments of $50,000 per year starting one year from now and with one installment each year thereafter until all 20 installments have been paid. The contract contains a clause that guarantees Parabola will get all of the money even if he is injured and cannot play a single game. Sports writers declare that Archie has become an "instant millionaire." The interest rate is 10%. 

Archie's sister, Gina, who majored in economics, explains to Archie that he is not a millionaire. How much is Archie's contract worth at the time he signed it? (Give your answer to two decimal places.)

What would be the present value of Archie's contract if the $50,000 annual payments continued forever? 

Suppose you have two options when investing money in the stock market: stock A and stock B. The returns on both are dependent on the state of the economy, which fluctuates with the business cycle. During periods of strong economic growth, the rates of return for stock A and stock B are 26.00 and 9.00, respectively. Periods of weak growth during recessions cause the rates of return for stock A and stock B to fall to 3.00 and 1.00, respectively. Additionally, assume that an economic boom is twice as likely as an economic downturn.

Calculate the expected return for stock A:    (Round to two decimals, if necessary.)

Calculate the expected return for stock B:  (Round to two decimals, if necessary.)

Assume that a safe, risk-free asset provides a return of 25.00%. On the other hand, you could invest in a risky asset with expected returns of 52.00% and standard deviation of 13.50%. To reduce risk, you decide to hold both risk-free and risky assets in portfolio Y. What is the equation for the budget line relating mean portfolio returns on the vertical axis and standard deviation of the portfolio return on the horizontal axis?

Choose one:

A. 6.00+2𝜎𝑥

B. 35.00+2𝜎𝑥

C. 25.00+2𝜎𝑥

D. 25.00+3𝜎𝑥

E. 15.00+4𝜎𝑥

Relative to this budget line, what can we say about portfolio Z with given information (standard deviation, mean return) = (14.50, 9)?

Choose one:

A. We prefer portfolio Z.

B. We do not prefer portfolio Z.

C. Portfolio Z is on the budget line.

D. We're indifferent between portfolio Z and the original portfolio Y.

Anna is thinking about making an improvement to her home. This modification will cost $10,000, but it will also increase the value of the home by $10,000 when Anna plans to sell it in 10 years. The market interest rate is 10%. 

a. What is the present value of the increased value of the home due to the improvement? 

b. What is the minimum amount at which Anna must personally value the improvement to be willing to go through with it? 

Suppose that a consumer started with an initial endowment of two goods. The table below lists the quantities of each good he starts with, and the prices at which these goods are bought and sold in the market. 

  Endowment Quantity. Market Price

Good 1. 14. 5

Good 2 13 2

What is the market value of this consumer's initial endowment?  

3) Assuming that firms compete a la Cournot, that all firms have the same marginal cost, and

that demand is linear, when is price most sensitive to changes in marginal cost: in a market

with very few firms or in a market with many firms? Show this formally. [Hint: assume

demand 𝑝 = 𝑎 – 𝑏𝑄]

b) Consider a Bertrand duopoly with differentiated products. Demand curves are given by

𝑝! = 600 − 2𝑞! − 𝑞"

𝑝" = 600 − 𝑞! − 2𝑞"

Suppose that the cost functions are given by (𝑞#) = 60𝑞# , for 𝑖 = 1, 2. Find the equilibrium

outputs, the prices and the profits.