A decision maker has a vNM utility function over money of u(x) = x². This decision maker is: O Risk Averse O Risk Neutral O Risk Loving O None of the above
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- Show that a decision maker who has a linear utilityfunction will rank two lotteries according to their expectedvalue.Three decision makers have assessed utilities for the following decision problem (payoffin dollars): The indifference probabilities are as follows: a. Plot the utility function for money for each decision maker.The dollar amount that a manager would be just willing to trade for the opportunity to engage in a risky decision is known as , Multiple Choice marginal utility of profit. the certainty equivalent. expected utility of profit. opportunity cost.
- Assumptions of rationality are violated because Choose one: A. both low-probability events and high-probability events are underanticipated. B. low-probability events are overanticipated whereas high-probability events are underanticipated. C. low-probability events are underanticipated whereas high-probability events are overanticipated. D. both low-probability events and high-probability events are overanticipated.In a repeated decision for which the present value of the benefits of cheating are greater than the present value of the costs of cheating, A. deciding to cheat is a value-maximizing decision. B.deciding to cheat is never a value-maximizing decision. C.None of the aboveJohn wants to buy a used car. He knows that there are two types of car in the market, plums and lemons. Lemons are worse quality cars and are more likely to break down than plums. John is willing to pay £10, 000 for a plum and £2, 000 for a lemon. Unfortunately, however, he cannot distinguish between the two types. Sellers can offer a warranty that would cover the full cost of any repair needed by the car for y ∗ years. Considering the type and likelihood of problems their cars can have, owners of plums estimate that y years of guarantee would cost them 1000y, owners of lemons estimate that the cost would be 2000y. John knows these estimates and decides to offer £10, 000 if a car comes with y ∗ years of warranty, £2, 000 if a car comes without warranty. For which values of y ∗ is there a separating equilibrium where only owners of plums are willing to offer the y ∗ -years warranty? Clearly explain your reasoning.
- ollowing is the payoff table for the Pittsburgh Development Corporation (PDC) Condominium Project. Amounts are in millions of dollars. State of Nature Decision Alternative Strong Demand S1 Weak Demand S2 Small complex, d1 8 7 Medium complex, d2 14 5 Large complex, d3 20 -9 Suppose PDC is optimistic about the potential for the luxury high-rise condominium complex and that this optimism leads to an initial subjective probability assessment of 0.8 that demand will be strong (S1) and a corresponding probability of 0.2 that demand will be weak (S2). Assume the decision alternative to build the large condominium complex was found to be optimal using the expected value approach. Also, a sensitivity analysis was conducted for the payoffs associated with this decision alternative. It was found that the large complex remained optimal as long as the payoff for the strong demand was greater than or equal to $17.5 million and as long as the payoff for…Consider a gamble/lottery in which a coin is tossed rapidly until a tail comes up. 2m rupee is given if the tail comes up at the mth toss. Let the individual be risk neutral, having u(x) = x where x is the amount of winning. Find the expected utility from the lottery.Leo owns one share of Anteras, a semiconductor chip company which may have to recall millions of chips. The stock currently trades at $100/share. Leo believes the probability that they have to recall the chips is 50%. If the chips have to be recalled, the stock price will be cut in half, but otherwise it will remain $100. The expected value of Leo's share is ______ Assume Leo has the utility function, U(X)=√X. The minimum price Leo would accept to sell his share is _______ Leo's risk premium is ________
- Translate the following monetary payoffs into utilities for a decision maker whose utility function is described by an exponential function with R 5 250: 2$200, 2$100, $0, $100, $200, $300, $400, $500You hold an oral, or English, auction among three bidders. You estimate that each bidder has a value of either $40 or $50 for the item, and you attach probabilities to each value of 50%. The winning bidder must pay a price equal to the second highest bid. The following table lists the eight possible combinations for bidder values. Each combination is equally likely to occur. On the following table, indicate the price paid by the winning bidder. Combination Number Bidder 1 Value Bidder 2 Value Bidder 3 Value Probability Price ($) ($) ($) 1 $40 $40 $40 0.125 2 $40 $40 $50 0.125 3 $40 $50 $40 0.125 4 $40 $50 $50 0.125 5 $50 $40 $40 0.125 6 $50 $40 $50 0.125 7 $50 $50 $40 0.125 8 $50 $50 $50 0.125 The expected price paid is . Suppose that bidders 1 and 2 collude and would be willing to bid up to a maximum of their values, but the two bidders would not be willing to bid against each…You hold an oral, or English, auction among three bidders. You estimate that each bidder has a value of either $100 or $125 for the item, and you attach probabilities to each value of 50%. The winning bidder must pay a price equal to the second highest bid. The following table lists the eight possible combinations for bidder values. Each combination is equally likely to occur. On the following table, indicate the price paid by the winning bidder. Bidder 1 Value Bidder 2 Value Bidder 3 Value Probability Price ($) ($) ($) $100 $100 $100 0.125 $100$100$1250.125 $100$125$1000.125 $100$125$1250.125 $125$100$1000.125 $125$100$1250.125 $125$125$1000.125 $125$125$1250.125 The expected price paid is . Suppose that bidders 1 and 2 collude and would be willing to bid up to a maximum of their values, but the two bidders would not be willing to bid against each other. The probabilities of the combinations of bidders are still…
