Question 2The car manufacturer Setla negotiates with battery producer Volt over buying a largenumber of batteries for their electric cars. When using Volt's regular line of batteries, Setla'sprofit would be £12M minus whatever Setla pays for the batteries. However, with 25%probability the demand for electric cars might crash as hydrogen cars become more popular.In that case, Setla's profit from their electric cars would be zero, less whatever they wouldpay for the batteries. Volt's costs of producing the agreed number of batteries would be£8M.After the contract has been negotiated, but before it becomes known whether electric carsare still going to be popular (i.e., whether Setla's profits are going to be high), Volt mayspend £1M on a new machine which can produce batteries the shape of which better fits toSetla's car design, resulting in a much larger boot capacity for Setla's cars. If Volt producesthese improved batteries, and the event occurs where electric cars are popular, Setla's profitwill increase to £16M (less the payment for the batteries). If instead hydrogen cars becomepopular, Setla's profit would still be zero (less the payment for the batteries). Volt's cost ofproducing the batteries will be the same (£8M) with or without the investment.The contract can only specify whether Setla and Volt trade and, if so, at which price, butcannot be contingent on the shape of the batteries. Assume that Setla and Volt agree on atotal contractual price of £10M for all batteries. Furthermore, contract law stipulates "specificperformance", and both firms have equal relative bargaining power.(a) Assume that Volt hasn't made the investment. Depending on whether the event whereelectric cars or hydrogen cars are popular occurs, determine whether Setla and Volttrade and each firm's expected profit?(b) Repeat (a) under the assumption that Volt has made the investment.(c) Is it profitable for Volt to make the investment?(d) Is joint payoff greater with or without the investment?(e) Briefly comment on your results, taking into account the nature of investment and thecontract.

There are two scenarios for both firms in the above question - For Volt - To invest in new machines…

The car manufacturer Setla negotiates with battery producer Volt over buying a larg number of batteries for their electric cars. When using Volt's regular line of batteries, Setla profit would be £12M minus whatever Setla pays for the batteries. However, with 25 probability the demand for electric cars might crash as hydrogen cars become more popula In that case, Setla's profit from their electric cars would be zero, less whatever they wou pay for the batteries. Volt's costs of producing the agreed number of batteries would b £8M. After the contract has been negotiated, but before it becomes known whether electric car are still going to be popular (i.e., whether Setla's profits are going to be high), Volt ma spend £1M on a new machine which can produce batteries the shape of which better fits Setla's car design, resulting in a much larger boot capacity for Setla's cars. If Volt produce

The car manufacturer Setla negotiates with battery producer Volt over buying a larg number of batteries for their electric cars. When using Volt's regular line of batteries, Setla profit would be £12M minus whatever Setla pays for the batteries. However, with 25 probability the demand for electric cars might crash as hydrogen cars become more popula In that case, Setla's profit from their electric cars would be zero, less whatever they wou pay for the batteries. Volt's costs of producing the agreed number of batteries would b £8M. After the contract has been negotiated, but before it becomes known whether electric car are still going to be popular (i.e., whether Setla's profits are going to be high), Volt ma spend £1M on a new machine which can produce batteries the shape of which better fits Setla's car design, resulting in a much larger boot capacity for Setla's cars. If Volt produce

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.8P

See similar textbooks

Similar questions

4.7 Hudson Corporation is considering three options for managing its data processing operation: continuing with its own staff, hiring an outside vendor to do the managing (referred to as outsourcing), or using a combination of its own staff and an outside vendor. The cost of the operation depends on future demand. The annual cost of each option (in thousands of dollars) depends on demand as follows: Demand Staffing Options High Medium Low Own staff 650 650 600 Outside vendor 900 600 300 Combination 800 650 500 If the demand probabilities are 0.2, 0.5, and 0.3, and the table below shows the total cost of the different options, construct a risk profile for the optimal decision in the table. Option Total Cost Own Staff 635 Outside Vendor 570 Combination 635
You are evaluating the possibility that your company bids $150,000 for a particular construction job. (a) If a bid of $150,000 corresponds to a relative bid of 1.20, what is the dollar profit that your company would make from winning the job with this bid? Show your work. (b) Calculate an estimate of the expected profit of the bid of $150,000 for this job. Assume that, historically, 55 percent of the bids of an average bidder for this type of job would exceed the bid ratio of 1.20. Assume also that you are bidding against three other construction companies. Show your work.
4.25 The Gorman Manufacturing Company must decide whether to manufacture a component part at its Milan, Michigan, plant or purchase the component part from a supplier. The resulting profit is dependent upon the demand for the product. The following payoff table shows the projected profit (in thousands of dollars): State of Nature Low Demand Medium Demand High Demand Decision Alternative s1 s2 s3 Manufacture, d1 -20 40 100 Purchase, d2 10 45 70 The state-of-nature probabilities are P(s1) = 0.35, P(s2) = 0.35, and P(s3) = 0.30. Use a decision tree to recommend a decision.Recommended decision: Use EVPI to determine whether Gorman should attempt to obtain a better estimate of demand.EVPI: $
A firm plans to expand its product line and faces a dilemma whether to build a small or largefacility to produce new products. If it builds a small facility and demand is low, the NPV afterdeducting for building costs will be four hundred thousand pesos. If demand is high, the firm caneither maintain the small facility or expand it. Expansion would have an NPV of four hundredfifty pesos while maintaining the small facility would have an NPV of fifty thousand pesos. If alarge facility is built and demand is high, the estimated NPV would be eight hundred thousandpesos. If demand turns out to be low, the NPV would be a loss of ten thousand. The probabilitythat the demand is high is estimated to be sixty percent.a. Analyze using a decision tree.b. Compute for EVPI.c. Determine the range over which each alternative would be best in terms of the valuewhen demand is low.
You're a contestant on a TV game show. In the final round of the game, if contestants answer a question correctly, they will increase their current winnings of $1 million to $3 million. If they are wrong, their prize is decreased to $750,000. You believe you have a 25% chance of answering the question correctly. Ignoring your current winnings, your expected payoff from playing the final round of the game show is [$ blank]. Given that this is positive [blank (positive/negative)], you should [blank (should/should not)] play the final round of the game. (Hint: Enter a negative sign if the expected payoff is negative.) The lowest probability of a correct guess that would make the guessing in the final round profitable (in expected value) is [blank]. (Hint: At what probability does playing the final round yield an expected value of zero?)
Assume Person A is offered the following game: If they want to participate in the game, theywill need to pay £5. If they participate, they can choose between Option A and Option B.Option A consists of spinning a roulette wheel with 37 different numbers (18 red, 18 black,and 1 green). If the outcome is red, the participant receives £10 and £0 otherwise. Option B isa fair coin flip that yields £5 when heads comes up and £10 when tails comes up.(a) What is the expected value of Option A?(ii) What is the expected value of Option B?(iii) What is the expected value of participating in the game and choosingOption A?(iv) What is the expected value of participating in the game and choosingOption B?(v) How much would the game need to cost to make it a fair game when youchoose Option A?(vi) How much would the game need to cost to make it a fair game when youchoose Option B?(b) Person A chooses to participate in the above described game. Which of thefollowing options can be true regarding…
Your company has a customer who is shutting down a production line, and it is your responsibility to dispose of the extrusion machine. The company could keep it in inventory for a possible future product and estimates that the reservation value is $350,000. Your dealings on the secondhandmarket lead you to believe that if you commit to a price of $400,000, there is a 0.4 chance you will be able to sell the machine. If you commit to a price of $450,000, there is a 0.25 chance you will be able to sell the machine. If you commit to a price of $500,000, there is a 0.1 chance you will be able to sell the machine. These probabilities are summarized in the following table. For each posted price, enter the expected value of attempting to sell the machine at that price. (Hint: Be sure to take into account the value of the machine to your company in the event that you are not be able to sell the machine.)
Risk-neutral Icarus Airlines must commit now to leasing 1, 2, or 3 new airplanes. It knows with certainty that on the basis of business travel alone, it will need at least 1 airplane. The marketing division says that there is a 50% chance that tourism will be big enough for a second plane only. Otherwise, tourism will be big enough for a third plane. This, plus revenue information, yields the following table: Planes Tourism Revenue Expected Leased Light Heavy Profit 2 $90 million $60 million $75 million 3 $10 million $110 million $60 million Without additional information, Icarus Airlines would Select one: A. lease 2 airplanes in order to guarantee it avoids the worst outcome, $10 million B. lease 3 airplanes because $110 million is greater than $90 million C. lease 2 airplanes because $75 million is greater than $60 million. D. lease 3 airplanes because $60 million is greater than $10 million.
The Miramar Company is going to introduce one of three new products: a Widget, a Hummer, or a Nimnot. The market conditions (favourable, Stable, or unfavourable) will determine the profit or loss the company realizes, as shown In the following payoff table: State of Nature Favourable Stable Unfavourable Product 0.2 0.7 0.1 $ $ $ Widget 120,000 70,000 -30,000 Hummer 60,000 40,000 20,000 Nimnot 35,000 30,000 30,000 Required: 1. Determine the best decision, using the following criteria Maximax Maximum LaPlace 2. Compute the expected value for each decision and select the best one.
please very very urgent Given the utility function, U(X)=ln(X) where X > 0, with initial consumption C=30000. Calculate the risk premium for a fair game with a chance of loosing -20000 is 0.5? (Hint: Start with the "fair game" definition)
Problem 12-05 (Algo) A risk-neutral consumer is deciding whether to purchase a homogeneous product from one of two firms One firm produces an unreliable product and the other a reliable product At the time of the sale, the consumer is unable to distinguish between the two firmsâ€™ products From the consumerâ€™s perspective, there is an equal chance that a given firmâ€™s product is reliable or unreliable The maximum amount this consumer will pay for an unreliable product is $0, while she will pay $210 for a reliable product a Given this uncertainty, what is the most this consumer will pay to purchase one unit of this product? $ b How much will this consumer be willing to pay for the product if the firm offering the reliable product includes a warranty that will protect the consumer? $ Problem 12-04 You are the manager of a firm that sells a â€œcommodityâ€ in a market that…
Consider a market for used computer printers, where buyers value good ones at $1,000 and bad ones at $760. Sellers value good ones at $910 and bad printers at $690. Sellers can attach a warranty at cost of $20 per month for good ones and $45 for bad ones. What is the minimum number of month necessary in order for the seller of good printers to be able to signal her type? Group of answer choices 5 6 9 11