# Toyondai's Financial Decision: To Buy or Rent?

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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 Qt-1where Qt and Qt-1 are current time period and one time period-lagged 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 short-run price elasticity of demand for gasoline? What does this mean in words?b.What is the long-run price elasticity of demand for gasoline? Does it make sense in this case that the long-run elasticity is different from the short-run elasticity? Why or why not?c.What does this imply for the volatility of gasoline prices in the short-run vs. the long run in response to oil price shocks that shift the supply curve for gasoline? Why?

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