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- 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 ________For each of the following scenarios, determine whether the decision maker is risk neutral, risk averse, or risk loving.a) A manager prefers a 10 percent chance of receiving $1,000 and a 90 percent chance of receiving $100 to receiving $190 for sure.b) A shareholder prefers receiving $775 with certainty to a 75 percent chance of receiving $1,000 and a 25 percent chance of receiving $100.c) A consumer is indifferent between receiving $550 for sure and a lottery that pays $1,000 half of the time and $100 half of the time.For each of the following scenarios, determine whether the decision maker is risk neutral, risk averse, or risk loving. a. A manager prefers a 20 percent chance of receiving $1,400 and an 80 percent chance of receiving $500 to receiving $680 for sure. b. A shareholder prefers receiving $920 with certainty to an 80 percent chance of receiving $1,100 and a 20 percent chance of receiving $200. c. A consumer is indifferent between receiving $1,360 for sure and a lottery that pays $2,000 with a 60 percent probability and $400 with a 40 percent probability.
- Calculate the risk premium of John when he faces the risky prospect X = {1, 4, 9, 16; 0.2, 0.4, 0.4, 0.0} . His utility function is u ( x ) = x , where x is wealth. (Use two decimals)You are a bidder in an independent private values auction, and you value the object at $4,500. Each bidder perceives that valuations are uniformly distributed between $1,000 and $10,000. Determine your optimal bidding strategy in a first-price, sealed-bid auction when the total number of bidders (including you) is: a. 2 bidders.Bid: $ b. 10 bidders.Bid: $ c. 100 bidders.Bid: $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, $500
- You are a bidder in an independent private auction, and you value the object at $2000. Each bidder assumes that the valuations are uniformly distributed between $1000 and $5000. Determine your optimal bidding strategy in a first-price sealed bid auction when the total number of bidders are: 2, 10, and 100.You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the accompanying table. Project Boom (50%) Recession (50%) A $ 20 −$ 10 B −$ 10 $ 20 C $ 30 −$ 30 D $ 50 −$ 50 The variance in the returns of project D is Multiple Choice 1,600. 225. 900. 0.Solve the following problem using an excel spreadsheet. A tobacco company isinterested in hiring a salesperson to promote smoking cigarettes in nightclubs. The position pays a flat salary of $50,000, regardless of sales levels. The firm has two applicants, Predictable Patty and Risky Ricky. Predictable Patty can produce with 100% certainty $100,000 a year in sales. Risky Ricky, on the other hand, can produce $300,000 with probability of 50%. But if he turns out to spend his time drinking and dancing in the nightclubs instead of making sales, he could actually cost the firm -$100,000 per year.a) During their first year on the job, what are the expected sales of Patty and Ricky? What are the firm’s expected profits on each worker?b) Now assume both workers are currently 25, and they will work until the retirement age of 65. The firm has the option to fire its new employee after one year based on sales, but can only hire one employee. Assume that it takes only one year to discover whether…
- You have a 50 percent chance of making $0, a 40 percent chance of making $100, and a 10 percent chance of losing $100. Calculate the expected value and variance of the payoff.Two employees witness fraud committed in their firm. Each has two pure strategies: to become a whistleblower and report a crime, or not to report a crime. Each employee gets a payoff of 1 if the crime is reported by someone (it does not matter if both or only one employee reports). However, reporting the crime is costly. An employee who reports has to pay the cost of reporting equal to 0.5-0.25*d, where d=1 if the other employee also reports, and d=0 otherwise. Suppose that employees simultaneously decide to report or not. There is a unique mixed strategy Nash equilibrium in this game where each employee reports with the same positive probability less than 1. What is the probability that the crime is reported by at least one employee in such an equilibrium? ________A risk-averse manager is considering two projects. The first project involves expanding the market for bologna; the second involves expanding the market for caviar. There is a 10 percent chance of a recession and a 90 percent chance of an economic boom. During a boom, the bologna project will lose $10,000, whereas the caviar project will earn $20,000. During a recession, the bologna project will earn $12,000 and the caviar project will lose $8,000. If the alternative is earning $3,000 on a safe asset (say, a Treasury bill), what should the manager do? Why?