I am in possession of two coins. One is fair so that it lands heads (H) and tails (T)with equal probability while the other coin is weighted so that it always lands H. Bothcoins are magical: if either is flipped and lands H then a $1 bill appears in your wallet,but when it lands T nothing happens. You may only flip a coin once per period. Theinterest rate is i per period. You are risk-neutral and thus only concern yourself withexpected values (and not variance). For simplicity, in the questions below assumeyou will live forever.1. How much are you willing to pay for such a coin that you know is fair?2. How much are you willing to pay for such a coin that you know is weighted?3. I currently own the coins and know which is fair and which is weighted, but youcannot tell which is which. You may make an offer to purchase a coin of yourchoosing, which I am free to accept or reject. What is the most you are willingto offer? Explain how you arrived at this answer.

Question
Asked Nov 14, 2019
241 views

I am in possession of two coins. One is fair so that it lands heads (H) and tails (T)
with equal probability while the other coin is weighted so that it always lands H. Both
coins are magical: if either is flipped and lands H then a $1 bill appears in your wallet,
but when it lands T nothing happens. You may only flip a coin once per period. The
interest rate is i per period. You are risk-neutral and thus only concern yourself with
expected values (and not variance). For simplicity, in the questions below assume
you will live forever.
1. How much are you willing to pay for such a coin that you know is fair?


2. How much are you willing to pay for such a coin that you know is weighted?


3. I currently own the coins and know which is fair and which is weighted, but you
cannot tell which is which. You may make an offer to purchase a coin of your
choosing, which I am free to accept or reject. What is the most you are willing
to offer? Explain how you arrived at this answer.

check_circle

Expert Answer

Step 1

1:
For a fair coin, the chance for getting a Head H as well as chance for getting a tail T is the same. The probability of getting the desired value from flipping the fair coin is thus equal to half. Thus, when the coin flips to give a H, it would generate $1 and when it lands on T, nothing will be received by the individual. Thus, the value that is expected to receive from getting a H multiplied with the probability of winning determines the willing to pay price by the individual. This means that the individual will be willing to pay $0.50 for the fair coin.

Step 2

2.

The weighted coin always lands on the H and that means the chance of winning the amount of $1 is hundred percent. The individual can receive the price amount at all the tria...

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Business

Economics

Related Economics Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: Imagine you are running a business that processes horticultural product, and is currently producing ...

A: 1) This offer will be accepted as the total revenue is greater than the total variable cost.

question_answer

Q: (Figure: Real Shocks) From Point X in the accompanying graph, a negative supply shock could change t...

A: In order to answer this question, one need to understand the terms mentioned below:Aggregate Supply:...

question_answer

Q: 6a, 6b, 6c, 6d

A: Since we answer only up to 3 sub-parts at a time, we will answer only the first three. Please post t...

question_answer

Q: 8. Natural monopoly analysis The following graph shows the demand (D) for electricity services in th...

A: Natural Monopoly:The natural monopoly is a monopoly which arises due to high startup cost or having ...

question_answer

Q: Carl B. Cotton owns a 10-acre farm filled with cotton plants. Each year he hires a few workers to pi...

A: Gross Domestic Product (GDP) is the value of the final goods and services produced in an economy in ...

question_answer

Q: Question 3 Suppose that the cost function of a firm is C(q)=4q. Suppose that this is the only firm i...

A: As the firm is a single seller in the industry it will maximize its profit at MR=MC

question_answer

Q: Describe how an expansive open market operation is conducted by a central bank

A: In open market operations. the Central Bank purchases or sells the securities in the open market in ...

question_answer

Q: If the short-run aggregate supply curve (SRAS) is horizontal, then an increase in aggregate demand l...

A: The correct option for the above-mentioned question is (c).

question_answer

Q: 15. During the 1960s, most economists believed that expansionary macro-policy Group of answer choice...

A: The correct statement is “Most economist believed that expansionary macro-policy that caused inflati...