Study Aid: Extra Exam Problems
These are problems that were in the first draft of the final exam but got eliminated in the process of reducing the exam to a reasonable length. They should help give you some idea of the sort of problems you can expect.
I. Briefly explain the advantages and disadvantages of including a liquidated damages term in a contract instead of waiting until breach occurs and then letting a court set damages based on expectation. Are there any advantages to a penalty clause--liquidated damages substantially above the actual cost imposed by a breach?
II. Firms sometimes make expenditures in one year in order to generate revenue in the next year, or collect revenue in one year for services they will produce in the next year. How does an accountant handle such situations?
III. You are the owner of a family firm established by your grandfather; over the years the firm has acquired various assets, including land, brand name reputation, and the like. You have now decided to take the firm public and retire, so want the balance sheet to look as good as possible. What transactions might you consider making in order to do so?
IV. What is the “efficient market hypothesis?” Why would one expect it to be approximately true? Why would one not expect it to be precisely true?
V. What is a public good? Why are public goods a problem? Briefly discuss alternative ways of dealing with the problem.
VI. What is a monopoly? Why do monopolies exist? How does a private, unregulated single price monopoly set the price to sell it? In what sense is that the “wrong price” if we take account of the interests of both producers and consumers?
VII. Give an example of price discrimination. If we take account of the interests of both producers and consumers is price discrimination a bad thing? Discuss.
VIII. What are the advantages and disadvantages of treating something as property rather than as a commons? Are there good reasons why copyright protection is given more easily and for a longer term than patent protection? Explain.
IX. If our objective is “the optimal number of exploding coke bottles,” what are the relative advantages of caveat emptor vs caveat venditor?
X. A statistician flips a coin a hundred times and reports that the probability that a fair coin would have come up heads at least as often as this one did is only .05. What, if anything, do you conclude about the probability that the coin is fair?
XI. You own a factory worth $1,000,000. Since that is most of your wealth, you would like to protect yourself against the risk that it will be destroyed by fire. You consider insuring it for $900,000.
How will buying such insurance affect your willingness to take expensive precautions against fire? From your standpoint, is this a good or bad thing? Explain. If it is a problem, what are ways in which you and the insurance company might solve it, short of leaving the factory entirely uninsured?