Imagine a market for used computers. There are two types of computers: good and bad. Also imagine that there are 50% of each on the market. Buyers can imagine paying 5,000 for a good computer and 1,000 for a bad computer Sellers want at least 4000 for a good computer and 1500 for a bad computer Assume that the buyer thinks that there is a 50% probability that the computer is of poor quality. What is the expected value and price of a computer that the buyer most wants to pay?

Imagine a market for used computers. There are two types of computers: good and bad. Also imagine that there are 50% of each on the market. Buyers can imagine paying 5,000 for a good computer and 1,000 for a bad computer Sellers want at least 4000 for a good computer and 1500 for a bad computer Assume that the buyer thinks that there is a 50% probability that the computer is of poor quality. What is the expected value and price of a computer that the buyer most wants to pay?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter17: Making Decisions With Uncertainty

Section: Chapter Questions

Problem 4MC

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Imagine a market for used computers. There are two types of computers: good and bad. Also imagine that there are 50% of each on the market. Buyers can imagine paying 5,000 for a good computer and 1,000 for a bad computer Sellers want at least 4000 for a good computer and 1500 for a bad computer -What would happen in the market if the buyer thinks that there is a 50% probability that the computers are of poor quality? What type (s) would be sold and what would the price be?
Q1) An expected utility maximiser owns a car worth £60000£60000 and has a bank account with £20000£20000. The money in the bank is safe, but there is a 50%50% probability that the car will be stolen. The utility of wealth for the agent is u(y)=ln(y)u(y)=ln⁡(y) and they have no other assets. Q2) Consider the setup from Question 1. A risk-neutral insurance company is willing to insure the car at the premium of π=£2/3π=£2/3 for every one pound of coverage. Q3) Consider the setup from Questions 1 and 2. How much profits, in expectation, does the insurance company earn on insuring the individual?
You have $1,000 that you can invest. If you buy Ford stock, you face the following returns and probabilities from holding the stock for one year: with a probability of 0.2 you will get $1,500; with a probability of 0.4 you will get $1,100; and with a probability of 0.4 you will get $900. If you put the money into the bank, in one year’s time you will get $1,100 for certain. a) What is the expected value of your earnings from investing in Ford stock? b) Suppose you are risk-averse. Can we say for sure whether you will invest in Ford stock or put your money into the bank?
Suppose the market for auto insurance is made of up two types of buyers: high-risk and low-risk. Buyers’ willingness to pay (WTP) for auto insurance plans, and sellers’ willingness to accept (WTA) when selling plans to each type of buyer, are outlined in a photo Assume now that there is asymmetric information and that insurance companies do not knowhow risky an individual buyer is. In the face of this uncertainty, they determine that the probability that a “walk-in” is high-risk is 0.75. What is the minimum price sellers are willing to accept when selling aninsurance plan? At this price, will low- and high-risk buyers both be willing to purchase this insurance plan? Explain. Be sure the mention adverse selection in your answer. Returning to the conditions outlined in Q1, suppose that buyers of auto insurance (high- and low-risk) were offered a $1,000 subsidy to purchase coverage. This would raise their WTP by $1,000. Would the market for both insurance plans clear after the…
could you answer part b to this question or if you have time part a and part b but part is more important. thank you Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. b) What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?
In the final round of a TV game show, contestants have a chance to increase their current winnings of $1 million dollars to $2 million dollars. If they are wrong, their prize is decreased to $500,000. The contestant thinks his guess will be right 50% of the time. Should he play? What is the lowest probability of a correct guess that would make playing profitable?
Johnny is "paid" by his parents $2o if he gets a grade A, $10 if he gets a grade B, whereas he has to pay his parents back $5 if he gets a grade other than A or B. On average 20% of the grades he gets are A, and 30% are grades B. What is the expected value of what he "earns" per grade ? What is the expected value of what he "earns" at school weekly if on average he gets five grades a week ? How long should Jim save until he collects enough money to buy a pair of brand new Hi-Fi headphones that cost $225?
Question 4 Suppose a prosecutor expects to convict a defendant with probability 0.5 and that the sentence on conviction is 10 years in prison. Assume the prosecutor values prison time at $1,000 per year (its value as a deterrent of crime), and incurs a cost of trial equal to $2,000. a. What is the minimum prison sentence the prosecutor will o er as part of a plea bargain if her objective is to maximize the expected value of the sentence imposed, less the cost of trial (ignore the information provided in b. below to answer this question a.)? b. Suppose the defendant believes his chances of being convicted are 0.3, his cost of prison time is $5,000 per year, and his cost of a trial is $1,000. Will he accept the plea bargain in a.?
Deborah is at the casino and is considering playing Roulette. In Roulette, a ball drops into one of 36 slots on a spinning wheel. 17 of the slots are red, 17 are black, and 2 are green. Each slot is equally likely and occurs with probability 1/36. Deborah bets $1.00 on black. If the ball drops into a black slot she receives $2.00 and if it drops into a red or green slot, she receives nothing. a) The expected value of Deborah’s bet (after subtracting the $1.00 she bet) is $________________ b) Given that Deborah makes this bet, is she risk adverse, risk neutral, or risk loving?
Consider Bob's decision problem: Sunny Cloudy Rainy Beach 2 3 2 Park 3 3 2 Mall -1 1 x Suppose the probability of Sunny is 0.25, the probability of Cloudy is 0.25, and the probability of Rainy is 0.5. What is the smallest value of x for which Mall is an expected utility maximiser? Round your answer to one decimal place (e.g. 0.5).
Consider two prospects. Problem 1: Choose between Prospect A: $2,500 with probability 0.33 $2,400 with probability 0.66 Zero with probability 0.01 Prospect B: $2,400 with probability 1.00 Problem 2: Choose between Prospect C: $2,500 with probability 0.33 Zero with probability 0.67 Prospect D: $2,400 with probability 0.34 Zero with probability 0.66 It has been shown by Daniel Kahneman and Amos Tversky (1979, “Prospect theory: An analysis of decision under risk,” Econometrica 47(2), 263-291) that more people choose B when presented with problem 1 and when presented with problem 2, most people choose C. These choices violate expected utility theory. Why?
Bob earn 60,000 a year and an accounting firm each year he receives Reyes Bob has determined that the probability that he receives a 10% raise is .7 the probability that he earns a 3% raise is .2 and the probability that he earns a 2% raise is .1 a competing company has offered Bob a similar position for 65,000 a year Bob wonders if he should take the new job or take his chances with his current job. a. Find the mathematical expectation of the dollar amount of his raise at his current job b.