4. You are a bitcoin trader. You have $1,000,000, and today one bitcoin costs $2000. To- morrow bitcoins will either cost $1000 or $4000, each with equal probability. (Assume the prices are constant all day and change instantly at midnight.) For each of the following, give a strategy and why it's correct: (a) tomorrow, what should you do? If you want to maximize the expected amount of money you have (b) tomorrow, what should you do? If you want to maximize the expected number of bitcoins you have

4. You are a bitcoin trader. You have $1,000,000, and today one bitcoin costs $2000. To- morrow bitcoins will either cost $1000 or $4000, each with equal probability. (Assume the prices are constant all day and change instantly at midnight.) For each of the following, give a strategy and why it's correct: (a) tomorrow, what should you do? If you want to maximize the expected amount of money you have (b) tomorrow, what should you do? If you want to maximize the expected number of bitcoins you have

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.5P

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You are in the market for a used car. At a used carlot, you know that the Blue Book value of the car youare looking at is between $15,000 and $19,000. Ifyou believe the dealer knows as much about the caras you do, how much are you willing to pay? Why?Assume that you care only about the expected valueof the car you will buy and that the car values aresymmetrically distributed.23. Refer to Problem 22. Now you believe the dealerknows more about the car than you do. How muchare you willing to pay? Why? How can this asymmetric information problem be resolved in a competitivemarket?
B. Richard's nickname is "No-Risk Rick" because he is an extremely risk-averse individual. His utility function is given by U(W) = √W. where W represents his current wealth in dollars. He currently has $100 worth of property, but there is a 50% chance that all of it will be stolen. What is Richard's expect wealth and expected utility of wealth? An insurance company offers to reimburse Richard for his loss if the money is stolen. What is the most that Richard would pay for such a policy? Explain. Please solve this with in 1 hour
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Suppose you have a house worth $200,000 (wealth). Your utility of wealth is given by U(w) = ln(w). There is a small chance that a fire will damage your house causing a loss of $75,000. You estimate there is a 2% chance of fire. a) What is your expected wealth? b) What is your expected utility from owning the house? c) Suppose you can add a fire detection/prevention system to your house. This would reduce the chance of a bad event to 0 but it would cost you $C to install. What is the most you are willing to pay for the security system? (Here is an identity you will find useful
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You are a coin trader. You have $1,000,000, and today one coin costs $2000. Tomorrow the coin will either cost $1000 or $4000, each with equal probability. Assume the prices are constant all day and change instantly at midnight. For each of the following, give a strategy and why it’s correct: (a) If you want to maximize the expected amount of money you have tomorrow, what should you do? (b) If you want to maximize the expected number of coins you have tomorrow, what should you do?
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Suppose you must choose between the two prospects, (40,000, 0.025) or (1,000): The prospect of winning 40,000 with a probability of 2.5% or winning 1,000 with certainty. Suppose, too, that the following three graphs represent your utility function (according to expected utility theory) and your weighting and value scales (according to prospect theory). Finally, suppose that your current wealth is 20,000. d. Based on prospect theory, which prospect would you choose? Why? e. Why is your decision different under the two theories? (Hint: what is one of the common human traits that prospect theory captures that expected utility theory cannot?)
What are some ways a seller of goods might reassure a possible buyer who is faced with imperfect information?