Finance 462
Problem Set #1
1)
Suppose
that, each year, you have a 2% chance of being involved in a car accident.
The damages from a car accident are $10,000.
a)
Assuming that you don’t purchase insurance, calculate the expected
value of your losses. Calculate the
standard deviation of your losses.
b)
Now, suppose that you by insurance.
How much should an insurance policy cost (Assuming everybody has a 2%
accident rate)? What happens to the expected value and standard deviation of
your losses?
c)
Now, suppose that there are two types of drivers.
Safe drivers have a 2% accident rate, while unsafe drivers have a 4%
accident rate. Assume that there are
an equal number of safe and unsafe drivers, but the insurance company can’t
distinguish between the two types. How
does your answer to (b) change?
Suppose that apples and oranges are the only two
goods available in the economy, and that they are sold in the quantities and
prices indicated in the following table

Apples 

Oranges 

Year 
Quantity 
Price 
Quantity 
Price 
1970 
30 
$1 
70 
$1 
2000 
40 
$4 
60 
$2 
2)
Suppose
the assuming that the average household spends 30% of its income on apples and
70% of its income on oranges each year, calculate the CPI for 1970 and 2000.
What is the average annual inflation rate?
3)
Using
1970 as the base year, calculate real and nominal GDP for 2000. What is the
implied annual inflation rate?
4)
Over the
past 30 years, we have seen a shift in consumer patterns in the
5)
Consider
an economy with 100 people in the labor force.
At the beginning of every month, 5 people lose their jobs and remain
unemployed for exactly one month; one month later, they find new jobs and become
employed. In addition, on January 1
of each year, 2 people lose their job and remain unemployed for 6 months.
Finally, on July 1 of each year, 1 person loses his job and remains
unemployed for 1 year.
a)
What is
the unemployment rate in this economy in a typical month?
b)
What is
the average duration of unemployment?