MyLab Economics with Pearson eText -- Access Card -- for Microeconomics
2nd Edition
ISBN: 9780134519517
Author: Daron Acemoglu, David Laibson, John List
Publisher: PEARSON
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Question
Chapter 15, Problem 8P
To determine
Independency assumption between the events in the following cases:
(a) A basketball player making her next shot irrespective of whether she made her last shot or not.
(b) Higher probability of other students to score above-average marks, when one student scores above average marks.
(c) The probability of defaults on a security when other securities are not dependent on each other.
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Max Pentridge is thinking of starting a pinball palace near a large Melbourne university. His utility is given by u(W) = 1 - (5,000/W), where W is his wealth. Max's total wealth is $10,000. With probability p = 0.9 the palace will succeed and Max's wealth will grow from $10,000 to $x. With probability 1 - p the palace will be a failure and he’ll lose $5,000, so that his wealth will be just $5,000.
What is the smallest value of x that would be sufficient to make Max want to invest in the pinball palace rather than have a wealth of $10,000 with certainty? ____
(Please round your final answer to the whole dollar, if necessary)
Max is thinking of starting a pinball palace near a large Melbourne university. His utility is given by u(W) = 1 - (5,000/W), where W is his wealth. Max's total wealth is $15,000. With probability p = 0.7 the palace will succeed and Max's wealth will grow from $15,000 to $x. With probability 1 - p the palace will be a failure and he’ll lose $10,000, so that his wealth will be just $5,000.
What is the smallest value of x that would be sufficient to make Max want to invest in the pinball palace rather than have a wealth of $15,000 with certainty?
(Please round your final answer to the whole dollar, if necessary)
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.?
Chapter 15 Solutions
MyLab Economics with Pearson eText -- Access Card -- for Microeconomics
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