You have determined that your risk tolerance is 160. Calculate your utility for the following payoffs: (Round your answers to 2 decimal places.) Payoff Utility 20 40 53
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- Five of ten people earn $0, four earn $100, and one loses $100. What is the expected payoff? What is the variance of the payoff?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.As risk aversion increases, which direction does the certainty equivalent wealth move, holding the bet fixed?
- Burger Prince Restaurant is considering the purchase of a $100,000 fire insurance policy. The fire statistics indicate that in a given year the probability of property damage in a fire is as follows: Fire Damage $100,000 $75,000 $50,000 $25,000 $10,000 $0 Probability .006 .002 .004 .003 .005 .980 If Burger Prince was risk neutral, how much would they be willing to pay for fire insurance? If Burger Prince has the utility values given below, approximately how much would they be willing to pay for fire insurance? Loss $100,000 $75,000 $50,000 $25,000 $10,000 $5,000 $0 Utility 0 30 60 85 95 99 100Matthew is playing snooker (more difficult variant of pool) with his friend. He is not sure which strategy to choose for his next shot. He can try and pot a relatively difficult red ball (strategy R1), which he will pot with probability 0.4. If he pots it, he will have to play the black ball, which he will pot with probability 0.3. His second option (strategy R2) is to try and pot a relatively easy red, which he will pot with probability 0.7. If he pots it, he will have to play the blue ball, which he will pot with probability 0.6. His third option, (strategy R3) is to play safe, meaning not trying to pot any ball and give a difficult shot for his opponent to then make a foul, which will give Matthew 4 points with probability 0.5. If potted, the red balls are worth 1 point each, while the blue ball is worth 5 points, and the black ball 7 points. If he does not pot any ball, he gets 0 point. By using the EMV rule, which strategy should Matthew choose? And what is his expected…Obi-Wan is considering whether to buy a lightsaber. With probability 0.50 he will value the lightsaber at $4,000, and with probability 0.50 he will value it at $1,000. If new lightsabers sell for $2,500, then buying a new lightsaber is a: Multiple Choice fair gamble. better-than-fair gamble. less-than-fair gamble. less-than-fair gamble if Obi-Wan risk neutral.
- Gary likes to gamble. Donna offers to bet him $31 on the outcome of a boat race. If Gary’s boat wins, Donna would give him $31. If Gary’s boat does not win, Gary would give her $31. Gary’s utility function is p1x^21+p2x^22, where p1 and p2 are the probabilities of events 1 and 2 and where x1 and x2 are his wealth if events 1 and 2 occur respectively. Gary’s total wealth is currently only $80 and he believes that the probability that he will win the race is 0.3. Which of the following is correct? (please submit the number corresponding to the correct answer). Taking the bet would reduce his expected utility. Taking the bet would leave his expected utility unchanged. Taking the bet would increase his expected utility. There is not enough information to determine whether taking the bet would increase or decrease his expected utility. The information given in the problem is self-contradictory.The table below shows that a sales agent can work with either low, or high amount of effort. Low effort generates$30,000, $60,000 or $100,000 profit (with probability given below), while high effort generates 60,000; 100,000 or 150, 000 (with probability given below) depending on some random factors. Bad luck (P=0.3) Medium luck (P=0.3) Good luck (P=0.4) Low effort (a=0) $30,000 $60,000 $100,000 High effort (a=1) $60,000 $100,000 $150,000 The cost of low effort is 0 and the cost of high effort is $10,000 (Formally, c=$10,000a). The net wage is wage minus cost of effort and the net profit is total profit minus wage. Suppose the firm offers the repair person a fixed wage of 13,000, what will be the net wage of the repair person and the net profit of the owner? Suppose now the owner offers the repair person the following bonus arrangement What will be the net wage of the repair person? What will be the net profit of the owner? Specify…A risk averse individual will always choose the safe but less profitable activity instead of the riskier but more profitable activity. True or False
- How much is his risk on any random day due to late arrival?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…What type of risk behavior does the person exhibit who is willing to bet $60 on a game where 20% of the time the bet returns $100, and 80% of the time returns $50? Is this a fair bet? Explain.
