An investor is to purchase one of three types of real estate, as illustrated in Figure below. Theinvestor must decide among an apartment building, an office building, and a warehouse. Thefuture states of nature that will determine how much profit the investor will make are goodeconomic conditions and poor economic conditions. The profits that will result from eachdecision in the event of each state of nature are shown in Table below:States of NatureDecisionGoOD ECONOMICPoOR ECONOMIC(Purchase)CONDITIONSCONDITIONS$ 50,000S 30,000Apartment buildingOffice building100,000- 40,000Warehouse30,00010,000a) Find the optimal act using Maxi-Max criteriab) Find the optimal act using Mini-Max criteriac) Find the optimal act using Maxi-Min criteriad)Find the optimal act using Min-Max regret table26°C Clear1O

State of Nature Decision (Purchase) Good Economic Condition Poor Economic Conditions Apartment…

Answered: An investor is to purchase one of three…

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter8: Market Failure

Section: Chapter Questions

Problem 10P

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Suppose that the buyers do not know the quality of any particular bicycle for sale, but the sellers do knowthe quality of the bike they sell. The price at which a bike is traded is determined by demand and supply.Each buyer wants at most one bicycle.(ii) Assuming that each buyer purchases a bike only if its expected quality is higher than the price,and each seller is willing to sell their bike only if the price exceeds their valuation, what is theequilibrium outcome in this market?
Imagine that a zealous prosecutor (P) has accused a defendant (D) of committing a crime. Suppose that the trial involves evidence production by bothparties and that by producing evidence, a litigant increases the probabilityof winning the trial. Specifically, suppose that the probability that the defendant wins is given by eD>(eD + eP), where eD is the expenditure on evidenceproduction by the defendant and eP is the expenditure on evidence production by the prosecutor. Assume that eD and eP are greater than or equal to0. The defendant must pay 8 if he is found guilty, whereas he pays 0 if heis found innocent. The prosecutor receives 8 if she wins and 0 if she losesthe case. (a) Represent this game in normal form.(b) Write the first-order condition and derive the best-response function foreach player.(c) Find the Nash equilibrium of this game. What is the probability that thedefendant wins in equilibrium.(d) Is this outcome efficient? Why?
[Adverse Selection] Each of the two players receives an envelope, in which there is anamount of money that is equally distributed from $0, $1, $2, ..., $100. The amounts in twoenvelopes are independent. After receiving the envelope, each individual can check exactlyhow much money is put in his/her own envelope. Then each player has the option to exchangehis/her envelope for the other individual's prize. The decisions are made simultaneously. Ifboth individuals agree to exchange, then the envelopes are exchanged; otherwise, if at leastone player chooses not to exchange, each individual keeps his/her own envelope and receivesits attached sum of money.a. Model this game as a static Bayesian game (write the normal formrepresentation) and find the Bayesian Nash equilibrium.b. Consider a new game where the probability distribution of money in eachenvelope is changed. The amount is equal to $100 with probability 90%, and is equalto each number in $0, $1, $2, ... ,$99 with probability 0.1%.…
Say there are two individuals; Hala and Anna who are deciding on either to buy health insurance on a pooling arrangement basis or otherwise. Both face a 30% probability of losing RM40 on medical services and 70% of losing nothing. With these information discuss whether Hala and Anna should join this arrangement or pay the medical services costs out of their own pocket money.
A risk-averse agent, Andy, has power utility of consumption with riskaversion coefficient γ = 0.5. While standing in line at the conveniencestore, Andy hears that the odds of winning the jackpot in a new statelottery game are 1 in 250. A lottery ticket costs $1. Assume his income isIt = $100. You can assume that there is only one jackpot prize awarded,and there is no chance it will be shared with another player. The lotterywill be drawn shortly after Andy buys the ticket, so you can ignore therole of discounting for time value. For simplicity, assume that ct+1 = 100even if Andy buys the ticket How large would the jackpot have to be in order for Andy to play thelottery? b) What is the fair (expected) value of the lottery with the jackpot youfound in (a)? What is the dollar amount of the risk premium that Andyrequires to play the lottery? Solve for the optimal number of lottery tickets that Andy would buyif the jackpot value were $10,000 (the ticket price, the odds of winning,and Andy’s…
If a doctor knows that an insurance company will pay for most of a patient's bill, the doctor has more of an incentive to require additional medical procedures and tests, even if the patient may not require them. This is an example of O A. adverse selection. O B. the principal-agent problem. O C. asymmetric information. O D. moral hazard.
Situation A: If a person lives for 3 years with a disease and the current standard of care for that disease means he/she lives with a utility level of 0.7 .-What is the QALY? If that person takes a new medicine (Medicine A) because of which his/her utility level increases to 0.8,-What will be the new QALY? Calculate the benefit of new medicine.
Elena applies for private insurance and resents the number of questions asked on the application. She states that since the primary contribution of insurance companies is to pool the risk of many individuals, they should care less about the characteristics of any one applicant and more about increasing the number of the patients that they insure. Furthermore, she states, when she had insurance through her employer, she hardly had to answer any questions. Use economic reasoning to explain to Elena the insurance company's behavior
Studying has both costs and benefits. If you continue tostudy (e.g., for a test) for as long as the marginal benefitsof studying are greater than the marginal costs, and youstop studying when the two are equal, will your actionbe consistent with having maximized the net benefits ofstudying? Explain your answer.
Dr. Wexler displays her medical degree in her officewaiting room, hoping patients will be impressed thatshe attended a prestigious medical school. This isan example ofa. moral hazard.b. adverse selection.c. signaling.d. screening.
Suppose that an incumbent can commit to producing a large quantity of outputbefore the potential entrant decides whether to enter. So, the incumbent Örst chooseswhether to produce a small quantity or a large quantity. The rival then decides whether toenter. If the incumbent commits to the small output level and if the rival does not enter,the rival makes $0 and the incumbent makes $900. If it does enter, the rival makes $125and the incumbent earns $450. If the incumbent commits to producing the large quantity,and the potential entrant stays out of the market, the potential entrant makes $0 and theincumbent makes $800. If the rival enters, the best the entrant can make is $0, the sameamount it would earn if it didnít enter, but the incumbent earns only $400. Show the gametree. What is the SPNE?
1 Consider an individual for whom utility is U = ln(I) There are two states of the world (G,B): Outcome G = 2000 with probability .4 Outcome B = 1000 with probability .6 W1 = 2000 L = 1000 π = .6 Option = invest $50 to lower π to .2 An insurance company is willing to offer a contract in which the individual pays a premium and gets full compensation for the loss (1000) in the bad state. a) With no insurance but the option of investing the $50, what is the utility of the individual? b) What is the first-best outcome for utility of the individual, insurance premium, and profits of the insurance company?

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