Problem Set 4 Math Reminders

Question 1

What do we need to remember with P=100-Q?

Answer 1

Q=q1+q2=2q

Question 2

NPV=?

Answer 2

NPV= coupon period 0 (if it exists) + (coupon/r)

Question 3

What do we use NPV for?

Answer 3

The NET cash flow only! (i.e. P-MC). The FC comes out AFTER NPV is determined.

Question 4

What is net surplus for two parties?

Answer 4

The total combined net surplus for both parties added together.

Question 5

How do we find optimal level of effort?

Answer 5

MB=MC

Question 6

What do we need to remember about MB=MC

Answer 6

We are given TB and TC, need to derive MB & MC

Question 7

What does CE mean?

Answer 7

Certainty Equivalent

Question 8

How do we find the risk premium?

Answer 8

Expected Value - Certainty Equivalent = Risk Premium

TB-TC-CE=RP

Question 9

When finding net payoff, what should we avoid?

Answer 9

don’t mix up the costs and benefits of e - e should stay simple.

Question 10

How do we find CE wage?

Answer 10

Expected wage minus cost minus risk premium.

Question 11

What do we need to remember when doing the holdup problem?

Answer 11

• don’t forget to account for the cost of the investment