Answered: Optlon 1 Option 2 Probability of…

Optlon 1 Option 2 Probability of Possible Probablity Possible Outcome Outcomes ($) of Outcome Outcomes ($) 1/16 150 1/5 120 4/16 300 1/5 255 6/16 750 1/5 1,500 4/16 300 1/5 255 1/16 150 1/5 120

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

Chapter20: The Problem Of Adverse Selection Moral Hazard

Section: Chapter Questions

Problem 3MC

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Question

Consider the two options in the following table, both of which have random outcomes: a. Determine the expected value of each option. b. Determine the variance and standard deviation of each option. c. Which option is most risky?

Optlon 1
Option 2
Probability of
Possible
Probablity
Possible
Outcome
Outcomes ($)
of Outcome
Outcomes ($)
1/16
150
1/5
120
4/16
300
1/5
255
6/16
750
1/5
1,500
4/16
300
1/5
255
1/16
150
1/5
120

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