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Chapter 2/Fundamental Economic Concepts

Chapter 2

Fundamental Economic Concepts

Solutions to Exercises

1. The number of checked bags should fall, as individuals internalize the external cost of added weight. However, the average weight should rise, as those checking bags would in all likelihood pack as much as possible to make up for the cost. 2. The wage in the market for oil spill cleanup efforts should rise, thanks to an increase in demand for labor. The wage in the market for similarly-skilled labor should also fall, as the relevant labor supply falls in response to the previous increase in wage. We would expect an increase in migration, as long as the wage of the home market was ...view middle of the document...

175)2(.3) ]= 96.492063, but as this is in millions, that is $96,492,063. c. Coefficient of variation = v = 96.492063 / 77.175 = 0.250 8

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Chapter 2/Fundamental Economic Concepts

5.

Comparing two projects, Project B appears riskier because it has a larger standard deviation ($125,000) than Project A, but that does not consider relative risk. Actually, Project A is riskier because it has a larger coefficient of variation than Project B does. CVA = vA = $40,000/$50,000 = 0.80 CVB = vB = $125,000/$250,000 = 0.50 Because the two projects are significantly different in size, the coefficient of variation (a relative measure of risk) is more appropriate. General Aeronautics question involving distributions. a. Because the price distribution is normal, the expected price is halfway between the most optimistic price and the most pessimistic price, or $1.5 million. From Table 1, the z value corresponding to leaving 10 percent in the lower tail of a normal distribution is approximately 1.28. Therefore, 1.28 standard deviations correspond to a distance of $500,000 below the mean ($1 million minus $1.5 million). Hence one standard deviation is equal to: 1.28 = -$500,000, or = $390,625. z = ($1.2 million $1.5 million) / $390,625 = 0.77, so from Table 1, we can find the p(z < 0.77) = 22.06%

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b.

c.

Solution to Case Exercise: Revenue Management at American Airlines

1. American Airlines must learn from the past on the probability of filling seats days in advance of the flight, for different times of the day, different days of the week, for both business class and coach seats, and for different destinations. If too few seats in a certain class have been sold, then the airlines many need to “sell” them to discounters like Priceline at...

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