Economics Answers

Explain how the rational expectation model is important in policy formations by any

government.

Explain three weaknesses that conflict with the predictions of the Solow Growth model. How do you think these can be eliminated

Elaborate on the various economies and diseconomies of scale. Find articles with companies expanding or restructuring due to economies and diseconomies of scale.

A finance company would like to engage in asset management within the firm. The firm measured its coefficient of absolute risk aversion A for all of its clients—the coefficients of absolute risk aversion range from -5 to 10. The client has to choose an investment to invest in, and the investments’ risks and returns are given in the table below.

Investment Expected Return, E(r) Standard Deviation,

A 0.12 0.30

B 0.15 0.50

C 0.21 0.16

D 0.25 0.21

a). All individuals have the utility function: U = E(r) – 1/2A*(Standard Deviation Squared). For all values in the absolute risk aversion range, identify which investment best suits an individual. Describe the results as ranges of the risk aversion parameter and present them in graphical form.

b). Based on the results in the analysis in a, what recommendations would you make to the CEO about the make-up of the company’s investments?

Does a change in producers’ technology lead to a movement along the supply curve or a shift in the supply curve? Does a change in price lead to a movement along the supply curve or a shift in the supply curve?

Imagine that you are a policymaker trying to decide whether to reduce the rate of inflation. To make an intelligent decision, what would you need to know about inflation, unemployment, and the tradeoff between them?

Becky and Sarah are sisters who share a room. Their room can easily get messy, and their parents are always telling them to tidy it. Here are the costs and benefits to both Becky and Sarah, of taking the time to clean their room: If both Becky and Sarah clean, they each spends two hours and get a clean room. If Becky decides not to clean and Sarah does all the cleaning, then Sarah spends 10 hours cleaning (Becky spends 0) but Sarah is exhausted. The same would occur for Becky if Sarah decided not to clean—Becky spends 10 hours and becomes exhausted. If both girls decide not to clean, they both have a dirty room.

1. What is the best outcome for Becky and Sarah? What is the worst outcome? (It would help you to construct a prisoner’s dilemma table.)
2. Unfortunately, we know that the optimal outcome will most likely not happen, and that the sisters probably will choose the worst one instead. Explain what it is about Becky’s and Sarah’s reasoning that will lead them both to choose the worst outcome.