Multiple Questions on Finance (Multiple Choice Questions Sample)

Multiple Questions on Finance
Part A
Let us say that you are indifferent between $1,000 today and $5,000 in forty years. What is your implicit discount rate? (Show the math.)
In this case, $1,000 is the present value of $5,000, whose period is 40 years. The equation below shows the relationship between present value and future value.
FV=PV1+rn
Where r= Implicit discount rate
n= number of periods
5000=10001+r40
r=5140-1=0.041
The implicit discount rate is 4.1 percent.
What are the problems with using “willingness to pay” to value something?
* The willingness to pay valuation is based on an individual’s subjective evaluation of the value of a commodity, leading to scenario misspecification (Hanemann, 1991).
* It is impossible to measure how much money people are willing to spend on scarce goods and services, so an objective measure of value cannot be used.
* Consumers must be willing to pay a specific price for their favorite commodities before purchasing them, thus qualifying as “willingness-to-pay” measures.
Why might using “willingness to accept” give different valuations than “willingness to pay” would give?
Willingness to accept (WTA) is the minimum amount of money a seller would be willing to accept in exchange for a good or service (Hanemann, 1991). If someone tenders their willingness to accept and the consumer is not ready to buy, then differences in valuation occur. When one takes the willingness to pay as a valuation on the demand curve, the assumption is that the consumer will purchase at any price up to that point where the willingness-to-pay falls at zero.
Explain why the “efficient” level of pollution might depend on the initial assignment of rights.
Efficient levels of pollution are those that maximize net pollution benefits while minimizing net pollution costs. In pollution control, pollution levels may or may not be inefficiently high in the initial assignment of rights (Jacobs, 2013). Pollution rights are not freely transferable, and the right to pollute is generally exclusive. If markets for pollutant emissions exist, then initial allocation would be efficient if the efficiency condition is intact. However, if emissions demand does not exist, then any initial grant of rights must satisfy the Pareto condition: at least one party is better off after a change, and no party is worse off.
What are some reasons why Coasean bargaining might not lead to an “efficient” level of pollution?
Coasean bargaining is a process whereby several parties negotiate over the assignment of rights to an air pollution abatement project. According to Jacobs (2013), Coasean bargaining is likely to give rise to inefficient pollution levels in circumstances where the marginal damage from pollution is slight or where transaction costs are high. Coaseans might be inclined to over-negotiate in such cases, leading to a higher pollution level than when private markets exist.
Similarly, Coasean bargaining might not lead to efficient pollution levels when transaction costs are high because of the large number of parties involved in the negotiation process (Jacobs, 2013). Finally, Coasean bargaining is likely to lead to inefficient pollution levels, even when marginal damages are negligible when the distributional consequences for negotiation parties become very large. This scenario could happen, for example, if one party has much more wealth than others in negotiation and would benefit significantly from a higher level of pollution.
Why is the growth rate of per capita consumption included in this model? Is it relevant?
The growth rate in this equation estimates how much spending will increase each period, for example, next year compared to this year. The equation sets up potential future spending by using a fixed percentage of current wealth and increasing that amount with inflation or another changing variable. Including the growth rate is relevant because planned spending is affected by expected growth, which is affected by future growth expectations.