What is the equilibrium price

Assignment Help Finance Basics

Reference no: EM1378433

1. P.T. Barnum is concerned about the health of his star trapeze artist. If the artist is capable of performing a triple somersault, PT's revenues will be m2. If however his star crashes and is unable to perform, revenues will only be m1. Lloyds of London is willing to offer PT insurance on the following terms: the premium for every dollar of insurance is γ. The insurance policy pays only if there is an accident. PT's expected utility function is

EU(c1,c2)=p1(c1)^(2/3) +p2(c2)^(2/3) (1)

where c1 is his consumption in the event of an accident; c2 his consumption if his trapeze star performs the triple somersault, p1 is the probability of an accident, and p2 is the probability of no accident.

1. (a) If x is the number of dollars of accident insurance purchased, derive equations which indicate the amount of consumption if there is an ac- cident and if there is not an accident. Use these equations to determine the budget constraint between c1 and c2. What is the price of an extra dollar of c1 in terms of c2? Why?

2. (b) Determine PT's demand functions for c1 and c2. PT's marginal utility of wealth function is: MU(c) =2/(3c^(1/3)).

3. (c) If the probability of an accident is 20%, γ = .20, m1 = 8, and m2 = 18, What are c1 and c2? Is PT fully insured? On a diagram draw PT's budget constraint, his utility maximizing indifference curve, and his optimal bundle.

4. (d) How much better off is PT for the ability to buy insurance? Show this on an expected utility diagram.

5. (e) What happens if γ = .8? What is x? Would you expect the insurance company to agree. (Explain). And what happens if γ = .1? What is x? Is PT over or under insured?

2. Monopoly. There are two types of gold mines in the world. The short-run cost function for the only low cost gold mine is c^l(q) = cq^2. The marginal cost of a low cost producer is MC^l = 2cq. There is a perfectly elastic supply of high cost producers and the cost function for a high cost producer is c^(q)=sq. The demand curve for gold is P =A-Q.

1. (a) For what parameter values could the low cost gold mine exercise market power? Why for high values of s does the low cost producer have market power?

2. (b) For A = 30, c = 1 and s = 4 what is the equilibrium price? Output and profits of the low cost gold mine? And for A = 30, c = 1 and s = 25 what is the equilibrium price? Output and profits of the low cost gold mine?

Reference no: EM1378433

Questions Cloud

Analyse cultural issues facing the la napoli restaurant : Critically analyse the cultural issues facing the ‘La Napoli' restaurant - Present a report on La Napoli Case Study

Developing training program questions : A paragraph for each question indicating the extent to which each question is likely to stimulate useful discussion of this topic and explain your answer.

Analyze the audience and state the objectives : Assume you have a meeting with a distance learning investment corporation's Chief Executive Officer and a few other high-ranking officers.

Presentation techniques for the different viewers : The write-ups given below are presentation techniques for the two different viewers in bold print. Make a PowerPoint slide show for at least one of the audience below.

What is the equilibrium price : What is the equilibrium price? Output and profits of the low cost gold mine and for what parameter values could the low cost gold mine exercise market power?

Weak communication between employees and managers : The Milinder Recycling Corporation has experienced significant growth over the last 2-years. Due to this growth, the Corporation is currently encountering problems in the following areas:

Discuss accounting treatment of bulgaris museum pieces : Discuss the accounting treatment of Bulgari's museum pieces, its implication and the understandability of disclosure

Compare the data collection techniques : Use the Internet, locate at least three articles pertaining to the same problem confronting your company you examined in your Business Problem Analysis Paper completed in Week Two.

Calculate the range, standard deviation, and variance : Find the estimated mean of the following frequency distribution and calculate the range, the standard deviation, and the variance.

User Account

All Pages