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Risk Averse Investment Decision

Q1. Consider a market characterized by the following inverse demand and supply functions:
P =10-2Q and P = 2 + 2Q.
a. Draw the Demand and Supply curves.
b. Compute the surplus received by consumers and producers in a perfectly competitive
equilibrium.

Q2. Recently the National Association of Broadcasters imposed restrictions on the amount of commercials that could be aired during children's television shows. This effectively reduced the quantity of advertising allowed during children's viewing hours by 33 percent. Within four months, the price of a minute of advertising on network television increased by roughly 14 percent. What impact do you predict this had on the revenues of the networks?

Q. 3 A division manager is presented with two new project proposals. Both projects are projected to cost $60,000. Project 1 is predicted to have a 50% chance of generating $100,000 in revenue and a 50% chance of generating only $50,000 in revenue. Project 2 is predicted to have a 75% chance of generating $100,000 in revenue and a 25% chance of totally flopping and generating effectively no revenue. If she is riskaverse,
which of the two will she prefer? If she wants to make money, will she launch that preferred project?

Solution Preview

Q1:
Please refer to the attachment.

Demand curve: P = 10 - 2Q
Supply curve: P = 2 + 2Q
You can also solve for the equilibrium by equating the two curves:
10 - 2Q = 2 + 2Q
Solve for Q: Q* = 2
Substitute Q* into any one of the equations and solve for P: P* = 6
Consumer surplus is the area of the upper triangle CS = (4 x 2)0.5 = 4
Producer ...

Solution Summary

This solution shows step-by-step calculations to determine the balance between demand and supply functions, revenues in functions and which investment is most secure.

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