Consider the following prospects: A: (0.5, 0, 0.5: $100, $60, $10) B: (0, 0.9, 0.1: $100, $60, $10) C: (0.2, 0.5, 0.3:$100, $60, $10) D: (0.4, 0.2, 0.4:$100, $60, $10) Show that D > A > B > C is consistent with expected utility theory, and that this preference ordering implies "risk loving" preferences. Show that C > B > D > A is inconsistent with expected utility theory. (a) (b)

Consider the following prospects: A: (0.5, 0, 0.5: $100, $60, $10) B: (0, 0.9, 0.1: $100, $60, $10) C: (0.2, 0.5, 0.3:$100, $60, $10) D: (0.4, 0.2, 0.4:$100, $60, $10) Show that D > A > B > C is consistent with expected utility theory, and that this preference ordering implies "risk loving" preferences. Show that C > B > D > A is inconsistent with expected utility theory. (a) (b)

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter20: The Problem Of Adverse Selection Moral Hazard

Section: Chapter Questions

Problem 3MC

See similar textbooks

Similar questions

An investor is considering the following two investments.•Investment 1 has an expected rate of return (profit) of 8% and costs $40 per share.•Investment 2 has an expected rate of return (profit) of 5% and costs $30 per share.The investor has $100 to invest to maximize her total expected rate of return, and shemust buy whole shares (not partial/factional shares) of the investments.(a) Formulate the investor’s integer programming problem.(b) Solve the investor’s problem using branch and bound and explain youranswer. How much of each investment does the investor purchase?
Solutions for 8, and 12
The following are the P/E ratios (price of stock divided by projected earnings per share) for 20 banks. 50, 19, 22, 21, 25, 18, 31, 21, 19, 14, 15, 18, 17, 34, 29, 23, 14, 18, 22, 22 Send data to calculator Find 20" and 75" percentiles for these ratios. (a) The 20th percentile: (b) The 75th percentile:| Continue Cip 40 4- %23 %24 3. 6. 7. R. 00 %24
A 40-year-old man in the U.S. has a 0.244% risk of dying during the next year. An insurance company charges $300 per year for a life-insurance policy that pays a $100,000 death benefit. What is the expected value for the person buying the insurance? Round your answer to the nearest dollar. Expected Value: S-55 Question Help: Video Submit Question Question 5 x for the year Message instructor Based on historical data, an insurance company estimates that a particular customer has a 2.6% likelihood of having an accident in the next year, with the average insurance payout being $2700. If the company charges this customer an annual premium of $180, what is the company's expected value of this insurance policy? S Question Help: Message instructor
Given f (x, y) - 4x? + 6xy – 5y² df(x,y) What is dx
Determine whether or not to stock a large supply of steel. There is uncertainty in the price of steel. Based on past history the following data are available Price (future) Prob (Price) PW if stocked PW if not stocked High 0.3 100000 0 Medium 0.5 -10000 0 Low 0.2 -50000 0 What is the probability that stocking steel will result in a negative present worth (PW)?
The AW value for Design A is $ /mi. (Round to the nearest hundreds.) The PW value for Design A is $ /mi. (Round to the nearest hundreds.) The AW value for Design B is $ /mi. (Round to the nearest hundreds.) The PW value for Design B is $ /mi. (Round to the nearest hundreds.) The most economical design on the basis of AW and PW is
Agamble based on a fair coin toss which pays $6.65 if the coin lands heads and $9.85 if the coin lands tails. (fair coin toss i.e. probability of heads is 50% = probability of tails is 50%) EV $8.25 E[U(w)) UJEV] >_U(EV) Low EU = U(EV) Neutral EU =_U(EV) Neutral u(w) w" 624.81 $ 561.51 u(w) 125+w 136.25 $ 136.25 u(w) Sin(w) 10.50 $ 10.50 Arisk agent, whose utility is given by U(w) = 5In(W) and initial wealth is $5,000 is faced with a potential loss of $3,800 with a probability of p=0.17. What is the maximum premium they would be willing to pay to protect themselves against this loss? risk appetite (wייט EV intial wealth EU 41.37 5,000 U(w-y) = E[U(w)] 5In(5,000-y)=B17 find y y= $ 1,077.13 If you are given the opportunity to buy insurance for $500 alt y= would you take the insurance? Utility functions w>0 u(w) w-9w u(w) 5In(w) u'(w) u'(w) u"(w) u"(w) A'(w) :>,,,,<=0 show your work A(w) Alw) A'(w) A'(w) R(w) R(w) R'(w) R'(w)
QUESTION 22 A deck of 52 playing cards consists of 4 suites: clubs, spades, hearts, and diamonds. Each suite consists of 13 cards. Draw one from a deck of cards. Let A=a card "2" is drawn, B=a "diamond" card is drawn. What is the value of P(B)? 1/52 4/52 13/52 16/52
c.) What is the expected value for profit? Fill out the table below to help you calculate the value The expected value for profit is 23 x f(x) x⋅f(x) -100 0.05 -50 0.15 0 0.30 50 0.35 100 0.12 200 0.03 E(x)=-
Just 2.9 Only D,E,F and G
2. Airtight Manufacturing produces plastic cases that utility companies buy to protect electronic components on utility poles from weather damage. (a) The protective case currently used by utility companies has a 0.045 probability of cracking or breaking in any given year. When a protective case cracks or breaks, the utility company incurs a $800 expense to replace the case. What is the expected value of the utility company’s repair costs per protective case? Show your work. (b) Airtight has recently developed a stronger material for its protective case. The use of this stronger material reduces the case’s probability of cracking or breaking and serves as a differentiating factor for estimating this product’s VTC. Use the product-needs matrix described in the course to classify this differentiating factor. What type of product characteristic is it? What type of customer need does it satisfy? Justify your answers. (c) If this stronger material enables Airtight’s new protective…