Toyondai's Financial Decision: To Buy or Rent?
Added on 20190916
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Directions:Download the examination between 12:00 am December 18 and 8:00 pm December 31, 2011. This is an open book exam. Please print your name clearly below and on each page of your answer sheets. Once downloaded, you are allowed to complete the examination in four hours  three hours in total to focus on the examination, and one hour to allow for downloading/uploading technologyrelated logistical snafus. It would be best if you take the examination all in one setting. However, the examination and answers must be uploaded back within 24 hours of it being downloaded (download and upload times will be time stamped). No examinations will be accepted after midnight, December 31, 2011.Answer all questions as clearly and legibly as possible. The exam has a total of 180 points. The number of points and a suggested amount of time is indicated for each question. In order to obtain full credit for your answers, you need to show your work. If you believe a question is ambiguous, in your answer state clearly any assumptions you are making.Please read and sign below:
1. (18 points, 18 minutes). Decide whether each of the following statements is True, False or Uncertain, and give a brief but clear explanation supporting your answer. Most of the credit will be given for your explanation.a.Both in perfect competition and in monopolistic competition, in long run equilibriumeconomic profits are zero. b.If the quantity demanded for your product varies greatly with changes in customer per capita incomes, this implies you face an elastic (flat) demand curve.c.The Commonwealth of Massachusetts taxes each bottle of alcohol sold. Assume the price elasticity of demand for wine is 5, the price elasticity for hard liquor is 2, and that the price elasticity of supply is the same for both types of alcohol at +2.True/False/Uncertain: A larger fraction of the alcohol tax will be passed on to hard liquor consumers than the fraction passed on to wine consumers.d.With sequential Bertrand competition in a market for two slightly differentiated products, it is generally preferable to be the player who prices second rather than the one who goes first.e.The average annual probability of a five year old dog having a urinary tract infection is 20%; the average annual cost of treating a five year old dog’s urinary tract infection is $150. Therefore, an animal health insurer offering an insurance policy covering urinary tract infections for five year old dogs that charges an annual premium of $30 can be expected on average to break even.
2. (18 points, 18 minutes). An econometric analysis of gasoline sales and price data provided the following gasoline demand equation estimates (ln refers to the natural logarithm):ln Qt = 3.5 – 0.16 ln PGt + 0.20 ln INCt + 0.8 ln Qt1where Qt and Qt1 are current time period and one time periodlagged quantities of gasoline (in hundreds of gallons), respectively, PGt is the current period price of gasoline in dollars, and INCtis per capita income in dollars. a.What is the shortrun price elasticity of demand for gasoline? What does this mean in words?b.What is the longrun price elasticity of demand for gasoline? Does it make sense in this case that the longrun elasticity is different from the shortrun elasticity? Why or why not?c.What does this imply for the volatility of gasoline prices in the shortrun vs. the long run in response to oil price shocks that shift the supply curve for gasoline? Why?
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