A publicly-owned monopoly is preferable to a privately-owned one’. Discuss and provide diagrams (50 marks)

An Individual consumes good X1 and X2. Let W be the wealth of the individual and P1>0, P2>0 be the prices of the goods. For each of the utility functions provide a real life example of two goods X1 and X2 that satisfy them, draw the indifference curves, determine whether preferences are convex, strictly convex or neither, and compute the Walrasian demand, indirect utility function, Hicksian demand, and Expenditure function.

1. U (X1, X2) =(X1^0.4) *(X^0.6)
2. U (X1, X2) =min (X1, X2) +3 max (X1, X2)

ABC plays football with the DEF Club in Mexico. If he does not suffer any injury by the end of the season, he will get a professional contract with GHI, which is worth 10,000 euros. If he is injured, he will get a contract as a fitness trainer in Ecuador, which is only worth 100 euros. The probability of suffering an injury is 10%. He is likely to get through the season unscathed with a 90%-probability.

1. Describe the gamble. How high is the expected value of this gamble?
2. How high is the expected utility, if his Bernoulli utility function of the VNM-utility function is u(x)=x^0.5?
3. Assuming he could buy insurance at the price P that would pay him 9,900 euro in the case of an accident, how high could the maximal value of P be for ABC to still afford the insurance?
4. Interpret the certainty equivalent. How high is the certainty equivalent c of the above gamble?
5. Calculate the coefficients of absolute risk aversion and interpret it. Is that a case of decreasing absolute risk aversion?

Why are competitive advantages never permanent?

Examples of monopolistically competitive markets include the markets for:

a. Books and novels

b. Wheat and corn

c. Postage stamps and wooden pencils

d. All of the above are correct

If the opportunity cost of good X in terms of good Y is 2Y, so you'll have to give up 2Y to get one X, the production possibility curve would look like:

a. a

b. b

c. c

d. a, b and c