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- 2- Who is risk aversion?Many decision problems have the following simplestructure. A decision maker has two possible decisions, 1 and 2. If decision 1 is made, a sure cost of c isincurred. If decision 2 is made, there are two possibleoutcomes, with costs c1 and c2 and probabilities p and1 2 p. We assume that c1 , c , c2. The idea is thatdecision 1, the riskless decision, has a moderate cost,whereas decision 2, the risky decision, has a low costc1 or a high cost c2.a. Calculate the expected cost from the riskydecision.b. List as many scenarios as you can think of thathave this structure. (Here’s an example to get youstarted. Think of insurance, where you pay a surepremium to avoid a large possible loss.) For eachof these scenarios, indicate whether you wouldbase your decision on EMV or on expected utilityPlease explain in detail about expected utility to get a positive upvote. An individual has a utility function U = W¼, where W is her total wealth. She has one safe asset worth Rs 5,000, and another risky asset whose value can be either Rs 5,000 or Rs 1,400 with equal probabilities. What is her expected utility? (a) Rs 11,400 (b) Rs 100 aw lo boeoqmoo vmonoos to on g cubire cou s o iva alagos ad a adWnooni lanou lo OAuti (c) Rs 2,580 (d) Rs 90
- Eunice, the industry analyst of H&M, wants to determine the propensity of Major Clothingcompanies toward risk. She was able to determine the utility distribution of H&M, Uniqloand Dickies. For H&M, If the expected payoff of a venture is a loss of 125,000, the utilityvalue is 0.00, if a loss of 75,000, the utility value is .2, if breakeven, the utility value is .5,if gain of 75,000 .8 and if gain of 125,000 utility value is 1. For Uniqlo, if loss of 125,000utility value is 0, if loss of 75,000 utility value is .1, breakeven is .4, if a gain of 75,000,utility value is .7 and if gain of 125,000 utility value is 1. For Dickies, if loss of 125,000,utility value is 0, if loss of 75,000, utility value is .3 breakeven is .6, if gain of 75,000, utilityvalue is .9 and gain of 125,000, utility value is 1. What is the propensity to risk of the threeinternet companies? Explain your graph.Suppose Grace and Lisa are to go to dinner. Lisa is visiting Grace from outof town, and they are to meet at a local restaurant. When Lisa lived in town,they had two favorite restaurants: Bel Loc Diner and the Corner Stable. Ofcourse, Lisa’s information is out of date, but Grace knows which is betterthese days. Assume that the probability that the Bel Loc Diner is better isp > 1/2 and the probability that the Corner Stable is better is 1 - p. Naturedetermines which restaurant Grace thinks is better. Grace then sends amessage to Lisa, either “Let’s go to the Bel Loc Diner,” “Let’s go to theCorner Stable,” or “I don’t know [which is better].” Lisa receives the message, and then Grace and Lisa simultaneously decide which restaurant to go to. Payoffs are such that Grace and Lisa want to go to the same restaurant, but they prefer it to be the one that Grace thinks is better. More specifically, if, in fact, the Bel Loc Diner is better, then the payoffs from theiractions are as shown in the…he person who requires high return regardles bf nsk s called (a There 1s no difference between return d riok preference. Drish averse O risk neutral (indifferent) (ay risk seeking
- A risk-neutral plaintiff in a lawsuit must decide whether to settle a claim or go to trial. The defendants offer $50,000 to settle now. If the plaintiff does not settle, the plaintiff believes that the probability of winning at trial is 50% if the plaintiff wins, the amount awarded to the plaintiff is X Will the plaintif settle if x is $62,500? What if X-$250,000? What is the critical value of X that would make the plaintiff indifferent between setting and going to trial? it the plaintiff were risk averse instead of risk neutral, would this critical value of X be higher or lower? If the amount to be awarded at trial with a win (X) were $62,500, then the plaintiff would settle If the amount to be awarded at trial with a win (X) were $250,000, then the plaintiff would not settle The critical value of X that would make the plaintiff indifferent between settling and going to trial is $ (Enter your response using rounded to wo decimal places)In the final round of a TV game show, contestantshave a chance to increase their current winnings of$1 million to $2 million. If they are wrong, theirprize is decreased to $500,000. A contestant thinkshis guess will be right 50% of the time. Should heplay? What is the lowest probability of a correctguess that would make playing profitable?Johnny is "paid" by his parents $2o if he gets a grade A, $10 if he gets a grade B, whereas he has to pay his parents back $5 if he gets a grade other than A or B. On average 20% of the grades he gets are A, and 30% are grades B. What is the expected value of what he "earns" per grade ? What is the expected value of what he "earns" at school weekly if on average he gets five grades a week ? How long should Jim save until he collects enough money to buy a pair of brand new Hi-Fi headphones that cost $225?
- 2 Consider the two investments listed below with possible outcomes and probabilities: INVESTMENT (in $1000) SAFE RISKY INVESTMENT AMOUNTⓇ 40+ 40+ GOOD SCENARIO OUTCOME 45+ 80+ AVERAGE+ SCENARIO PROB OUTCOME 0.40* 0.40€ 42+ 45+ BAD+ SCENARIO PROB OUTCOME PROB 0.20 35+ 0.20 10+ 0.40€ 0.40+ b) a) Suppose I have utility function U(*) = (x)2. What is the expected utility from each investment? Which investment will I choose, if any? Show and explain your work and provide the intuition. c) What is the value of the risk premium for the SAFE investment? Show and explain your work and provide the intuition. d) What is the value of the risk premium for the RISKY investment? Show and explain your work and provide the intuition.< +Economics Shawn's consumption is subject to risk. With probability 0.75 he will enjoy 10000 in consumption, but with probability 0.25 he will have only 3600. His utility function for consumption is given by v(c) = Vc. -What is the expected value of Shawn's consumption? -What is his expected utility? -What is his certainty equivalent of having 10000 with probability 0.75 and 3600 with probability 0.25?1. A dealer decides to sell a rare book by means of an English auction with a reservation price of 54. There are two bidders. The dealer believes that there are only three possible values, 90, 54, and 45, that each bidder’s willingness to pay might take. Each bidder has a probability of 1/3 of having each of these willingnesses to pay, and the probabilities for each of the two bidders are independent of the other’s valuation. Assuming that the two bidders bid rationally and do not collude, the dealer’s expected revenue is approximately ______. 2. A seller knows that there are two bidders for the object he is selling. He believes that with probability 1/2, one has a buyer value of 5 and the other has a buyer value of 10 and with probability 1/2, one has a buyer value of 8 and the other has a buyer value of 15. He knows that bidders will want to buy the object so long as they can get it for their buyer value or less. He sells it in an English auction with a reserve price which he must…