Expert answer:homework about intermediate microeconomics

Answer & Explanation:homework2 f15.docx
homework2_f15.docx

Unformatted Attachment Preview

Homework #2
1. Barbara is a college student seeking to optimize her consumption over two periods, with
period 1 being her college years and period 2 her after college life. Her income for her college
years (period 1) is $40,000 while her income for her post college years (period 2) is $1,000,000.
a. Barbara can borrow or lend at a 20% interest rate. Graph her budget constraint for income
spent on consumption in periods 1 and 2, and be sure to indicate the x-axis and y-axis intercepts
for this budget line.
b. Barbara’s utility function for income in periods 1 and 2 is c11/4*c23/4, where c1 is income spent
on consumption in period 1 (school years) and c2 is income spent on consumption in period 2.
At the 20% interest rate, will Barbara want to borrow, save, or just spend her income of $40,000
in period 1, given her lifetime budget constraint from part a?
2. Bill has a utility of money or wealth function given by u(x) = x1/2 and faces a coin flip (equal
.5 probabilities) to win or lose $1,000. Calculate his certainty equivalent wealth level for this
gamble if his initial wealth level is a) $5,000; b) $20,000; c) $100,000. Describe what is
happening to Bill’s willingness to pay for insurance against this bet as his wealth goes up.
3. Suppose that on average people have $5,000 a year in medical expenses, and when adding in
a margin for administrative costs, insurance fraud, and profit, a health insurance policy could be
priced at $7,000.
a. Healthy Heather has initial wealth of $50,000, a utility of money given by u(x) = x 1/2, and
faces a 10% chance of $20,000 in medical expenses. Will Heather purchase health insurance at
the price of $7,000? Show your work.
b. Sickly Sarah also has initial wealth of $50,000 and a utility of wealth function given by u(x) =
x1/2, but faces a 40% chance of $20,000 in medical expenses. Will Sarah purchase health
insurance at the price of $7,000? Show your work.
c. What will average medical expenses be given who purchases health care if policies are priced
at $7,000?
4. Joe cares about his income and the income of his cousin, Marty. Joe’s utility function is
given by minimum(5*YJoe, YMarty), where YJoe and YMarty are the amounts of money each has to
spend.
A. Initially Joe’s income is $200,000 and Marty’s income is $20,000. Calculate the personal
utility-maximizing transfer (if any) Joe would make to Marty in this case.
B. Mr. Scrooge does not care at all about his distant cousin Tiny Tim. Draw out the indifference
curves which would reflect Scrooge’s preferences about income distribution between himself
and Tim.
5. Show whether the following production functions exhibit increasing, constant, or decreasing
returns to scale.
a. Q = 3L + 2K
b. Q = min (L, 2*K)
c. Q = 10*K*L
d. Q = L2 + K2
e. Q = 2*K.5*L.5 + 7
6. Let the production function for thingamajigs be Q = L1/2*K1/2, the price of labor be $10 and
the price of capital be $20. In the short run, the amount of capital is fixed at K = 100. Complete
the following short run cost table for this firm (on your own paper, not this sheet!).
Quantity
Labor
Total
Fixed
Cost
Average
Fixed
Cost
Total
Variable
Cost
Average
Variable
Cost
Total
Cost
Average
Total
Cost
10
50
100
200
300
400
500
8. Suppose that Acme Widgets has two production facilities, one in Troy and the second in
Luverne. The marginal cost of producing widgets of producing widgets in Troy is given by:
MCTroy = 4*(QTroy/100).
The marginal cost of producing widgets at the Luverne plant is:
MCLuverne = 6 + 2*(QLuverne/100).
If Acme wants to minimize the total cost in each case, how should it divide the following
production totals between the two plants?
a. 100
b. 600
c. 1200
…
Purchase answer to see full
attachment

How it works

1. Paste your instructions in the instructions box. You can also attach an instructions file
2. Select the writer category, deadline, education level and review the instructions 
3. Make a payment for the order to be assignment to a writer
4.  Download the paper after the writer uploads it 

Will the writer plagiarize my essay?

You will get a plagiarism-free paper and you can get an originality report upon request.

Is this service safe?

All the personal information is confidential and we have 100% safe payment methods. We also guarantee good grades