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Econ 370

HW#4 (please type; diagrams may be drawn by hand)

## D.                Charging more for hardback books than paperback books.

III.

## F.                 Breaking up the Gotti crime family.

V.                 You have lost your homework, and need to decide if you should just re-do it, or look around for it.  You value your time at \$10/hour - that's about 83 cents for 5 minutes.  It will take you 1 hour to re-do the homework.  Your searching abilities are as follows:

 Total Time Spent (minutes) Chance of Finding HW Expected Marginal Benefit of Search 5 25% .25*\$10=\$2.50 10 45% (.45-.25)*\$10=\$2.00 15 60% 20 70% 25 75%

A.                 Fill in the 3rd column of the table.  The "expected marginal benefit of search" is just the value of the (complete) homework times the marginal increase in the probability of finding it.

B.                 What is your marginal cost of searching for five minutes?

C.                Search theory says you will set the marginal cost of search equal to the expected marginal benefit of search.  If this is true, how long will you search for?  (Feel free to round to the nearest table entry).

D.                Suppose you search until the marginal cost of search equals the expected marginal benefit, but you still haven't found your homework.  Should you search some more, or give up?  Why?

VI.               How much time do you spending "searching for" (selecting) your classes?  Have you ever found yourself stuck in a bad class because you did not search enough?

VII.              Watch (or listen to) two commercials.

A.                 Did they alert people to the existence of a product, remind them about a product, provide information about price, or provide information about product features?

C.                Did the regulation of advertising appear to affect the presentation or content of the commercial in any way?  Think hard.

VIII.            Suppose people buy "lightning insurance," which insures them against being struck by lightning.  Saving the life of a person struck by lightning costs \$1,000,000.  The odds of this happening to a given person is 1-in-a-million.

A.                 What is the "actuarially fair premium" for lightning insurance?

B.                 Why must the market premium somewhat exceed the actuarially fair premium?

C.                Suppose there is a group of recreational lightning watchers.  Their chance of being struck by lightning is 1-in-a-100.  What is their actuarially fair premium?

D.                Suppose 10% of people are lightning watchers, while 90% are not lightning watchers.  If the law requires insurers to charge them the same premium, what will the actuarially fair premium be?

E.                 If the premium for lightning insurance exceeds \$10, regular people refuse to buy it.  What then will be the impact of banning risk-adjusted premiums on the quantity and price of insurance sold?

IX.               Present a signaling explanation of each of the following (the signaling explanation does not have to be right - just try to come up with a plausible one).  Be sure to specify: (a) What "types" people are trying to distinguish, and (b) Why the different types have different costs of doing the particular kind of signaling.

B.                 Wearing a suit for an interview.

C.                Having a big military parade in Red Square.

D.                Giving away free samples of your product.

X.

A.                 Which class in college has given you the most job-related skills?

B.                 Which class in college has given you the least job-related skills?

C.                What percent of the first class was "signaling" (as opposed to job-related training)?  What percent of the second class was "signaling"?

D.                Puzzle: Why don't employees give their employers money-back guarantees?