ECON 11A Midterm: ECON11A Practice 2015 Winter Solutions

Let us have an economy that lives only for 2 periods. The representative household has a utility function that values consumption goods for any period as follows

u(c) = ln(c).

The valuation throughout both periods can be represented as a total utility function that discounts future utility with a β discount parameter as follows,

U(c1, c2) = u(c1) + βu(c2) = ln(c1) + β ln(c2),

where ct represent consumption good in period t for every period t = 1, 2. The budget constraint for this person in every period is expressed as

(1+τtc)ct + xt =(1−τtI)(wtnt +rtkt), t=1,2.

where xt represent investment in period t, wt the wages earned by hours worked, rt the return of capital in period t, nt the hours worked supplied by the household in every period t, kt the stock of capital that the household has in period t, τtc the tax rate imposed by the government in consumption goods in every period t, and τtI the tax rate imposed by the government to total household income in every period t. In every period, the total amount of hours that the representative household is of H ̄ = 1. Investment in every period can be defined by the following law of motion of capital

kt+1 = xt +(1−δ)kt, t=1,2.

Acknowledge that k3 = 0 because there is no period 3 in this economy. The household starts with a given amount of capital k ̄1 > 0. The representative firm produces good by the following production function in every period t,

Y_t =z_tK_tαN_t1−α, t=1,2.

There is a government that covers government expenditures in period 1 and period 2 by taxing capital rent and labor. Hence, their budget can be expressed as

τtcct +τtI(wtnt +rtkt)=gt, t=1,2.

a) Before writing any competitive equilibrium definition or the Social Planner Problem, can we modify the budget constraint in 
order to get rid a variable in every period? Explain.

b) Define the Social Planner Problem.

c) Solve the Social Planner Problem. This is, find the Euler equation in terms of exogenous variables and the only endogenous variable k2.

d) Define the tax distorted competitive equilibrium of this economy.

e) Solve the representative household problem.

f) Solve the representative firm problem in period 1 and 2.

g) Find the optimal Euler equation in terms of exogenous variables and the only endogenous variable k2.

h) Imagine that the government can only implement income taxes. This is τtc = 0 for every period t = 1, 2. Can the government implement a tax plan that achieves the Pareto allocation reached by the Social Planner Problem?

i) Imagine that the government can only implement consumption taxes. This is τtI = 0 for every period t = 1,2. Can the government implement a tax plan that achieves the Pareto allocation reached by the Social Planner Problem? 


This assignment requires the following knowledge: For k different events, if the probability that each of them happens is p (0 < p < 1) and all events happen independently, the probability that all events happen together is p^k.
1. Five firms, namely A, B, C, D and E, issue discounted bonds with face value $1,000 and maturity 5 years in the market. All firms are pretty risky and each of them has a chance of 0.5 of collapse during the five years (thus bankrupted and can not pay back the bond accordingly). The bonds are all sold at an interest rate of 50% (the value is not surprising due to the extremely high risk of default).
(1) What is the present value of the bond given the interest rate, the face value and the maturity? Hint: we temporarily do not consider the issue of default.
(2) Say now you buy one bond from each of the five firms, what is the total amount you lend out today? Eventually only one firm does not fail and pays back the bond, what is the money you collect back 5 years later? You gain or loss in this case? If more than one firm pays back the bond, will you get more money back?
(3) What is the chance (probability) that you get nothing back assuming that firms fail independently? Together with the answer in (2), is it a good deal to buy one bond from each of the five firms?
(4) Repeat (2) and (3) with the only difference that now you buy 5 bonds from a single firm.
(5) Now we assume that the five firms all have similar businesses in Greece (and those are their only businesses), therefore, all firm fail together if the economy in Greece fails. Will you answer in (3) change?

1.Write a function encipher(s, n) that takes as inputs an arbitrary string s and a non-negative integer n between 0 and 25, and that returns a new string in which the letters in s have been "rotated" by n characters forward in the alphabet, wrapping around as needed. For example:

>>> encipher('hello', 1) result: 'ifmmp'

>>> encipher('hello', 2) result: 'jgnnq'

>>> encipher('hello', 4) result: 'lipps'

Upper-case letters should be "rotated" to upper-case letters, even if you need to wrap around. For example:

>>> encipher('XYZ', 3)

result: 'ABC'

Lower-case letters should be "rotated" to lower-case letters:

>>> encipher('xyz', 3)

result: 'abc'

Non-alphabetic characters should be left unchanged:

>>> encipher('#caesar!', 2)

result: '#ecguct!'

Hints/reminders:

You can use the built-in functions ord and chr convert from single-character strings to integers and back:

>>> ord('a')

result: 97

>>> chr(97)

result: 'a'

You can use the following test to determine if a character is between 'a' and 'z' in the alphabet:

if 'a' <= c <= 'z':

A similar test will work for upper-case letters.

We recommend writing a helper function rot(c, n) that rotates a single character c forward by n spots in the alphabet. We have given you a template for this helper function in ps3pr3.py that checks to ensure that c is a single-character string. We wrote rot13(c) in lecture; rot(c, n) will be very close to rot13(c)! You can test your rot(c, n) as follows:

>>> rot('a', 1)

result: 'b'

>>> rot('y', 2)

result: 'a'

>>> rot('A', 3)

result: 'D'

>>> rot('Y', 3)

result: 'B'

>>> rot('!', 4)

result: '!'

Once you have rot(c, n), you can write a recursive encipher function.

Once you think you have everything working, here are three more examples to try:

>>> encipher('xyza', 1)

result: 'yzab'

>>> encipher('Z A', 2)

result: 'B C'

>>> encipher('Caesar cipher? I prefer Caesar salad.', 25)

result: 'Bzdrzq bhogdq? H oqdedq Bzdrzq rzkzc.'

2.Write a function decipher(s) that takes as input an arbitrary string s that has already been enciphered by having its characters "rotated" by some amount (possibly 0). decipher should return, to the best of its ability, the original English string, which will be some rotation (possibly 0) of the input string s. For example:

>>> decipher('Bzdrzq bhogdq? H oqdedq Bzdrzq rzkzc.')

result: 'Caesar cipher? I prefer Caesar salad.'

Here are two more examples:

>>> decipher('Hu lkbjhapvu pz doha ylthpuz hmaly dl mvynla lclyfaopun dl ohcl slhyulk.')

result: 'An education is what remains after we forget everything we have learned.'

>>> decipher('python')

result: 'eniwdc'

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def rot(c, n):
    """ your docstring goes here """
    # check to ensure that c is a single character
    assert(type(c) == str and len(c) == 1)

def letter_prob(c):
    """ if c is the space character (' ') or an alphabetic character,
        returns c's monogram probability (for English);
        returns 1.0 for any other character.
        adapted from:
       
    """
    # check to ensure that c is a single character   
    assert(type(c) == str and len(c) == 1)

    if c == ' ': return 0.1904
    if c == 'e' or c == 'E': return 0.1017
    if c == 't' or c == 'T': return 0.0737
    if c == 'a' or c == 'A': return 0.0661
    if c == 'o' or c == 'O': return 0.0610
    if c == 'i' or c == 'I': return 0.0562
    if c == 'n' or c == 'N': return 0.0557
    if c == 'h' or c == 'H': return 0.0542
    if c == 's' or c == 'S': return 0.0508
    if c == 'r' or c == 'R': return 0.0458
    if c == 'd' or c == 'D': return 0.0369
    if c == 'l' or c == 'L': return 0.0325
    if c == 'u' or c == 'U': return 0.0228
    if c == 'm' or c == 'M': return 0.0205
    if c == 'c' or c == 'C': return 0.0192
    if c == 'w' or c == 'W': return 0.0190
    if c == 'f' or c == 'F': return 0.0175
    if c == 'y' or c == 'Y': return 0.0165
    if c == 'g' or c == 'G': return 0.0161
    if c == 'p' or c == 'P': return 0.0131
    if c == 'b' or c == 'B': return 0.0115
    if c == 'v' or c == 'V': return 0.0088
    if c == 'k' or c == 'K': return 0.0066
    if c == 'x' or c == 'X': return 0.0014
    if c == 'j' or c == 'J': return 0.0008
    if c == 'q' or c == 'Q': return 0.0008
    if c == 'z' or c == 'Z': return 0.0005
    return 1.0