MICROECONOMICS
null Edition
ISBN: 9780134519494
Author: Acemoglu
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 15, Problem 9P
To determine
Expected value of the gamble.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
You are considering a $500,000 investment in the fast-food industry and have narrowed your choice to either a McDonald’s or a Penn Station East Coast Subs franchise. McDonald’s indicates that, based on the location where you are proposing to open a new restaurant, there is a 25 percent probability that aggregate 10-year profits (net of the initial investment) will be $16 million, a 50 percent probability that profits will be $8 million, and a 25 percent probability that profits will be −$1.6 million. The aggregate 10-year profit projections (net of the initial investment) for a Penn Station East Coast Subs franchise is $48 million with a 2.5 percent probability, $8 million with a 95 percent probability, and −$48 million with a 2.5 percent probability. Considering both the risk and expected profitability of these two investment opportunities, which is the better investment? Explain carefully.
An investor is considering three strategies for a $1,000 investment. The probable returns are estimated as follows: • Strategy 1: A profit of $10,000 with probability 0.15 and a loss of $1,000 with probability 0.85 • Strategy 2: A profit of $1,000 with probability 0.50, a profit of $500 with probability 0.30, and a loss of $500 with probability 0.20 • Strategy 3: A certain profit of $400 Which strategy has the highest expected profit? Explain why you would or would not advise the investor to adopt this strategy.
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.
Knowledge Booster
Similar questions
- 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.arrow_forwardMatthew 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…arrow_forwardThe promoter of a football game is concerned that it will rain. She has the option of spending $14,040 on insurance that will pay $39,000 if it rains. She estimates that the revenue from the game will be $65,040 if it does not rain and $30,040 if it does rain. What must the chance of rain be if buying the policy has the same expected return as not buying it? Write expressions showing the expected returns if the promoter does and does not purchase the insurance, using p to represent the probability of rain. Without insurance, E(return) = With insurance, E(return) = The chance of rain must be _%.arrow_forward
- Clancy has difficulty finding parking in his neighborhood and, thus, is considering the gamble of illegally parking on the sidewalk because of the opportunity cost of the time he spends searching for parking. On any given day, Clancy knows he may or may not get a ticket, but he also expects that if he were to do it every day, the average amount he would pay for parking tickets should converge to the expected value. If the expected value is positive, then in the long run, it will be optimal for him to park on the sidewalk and occasionally pay the tickets in exchange for the benefits of not searching for parking. Suppose that Clancy knows that the fine for parking this way is $100, and his opportunity cost (OC) of searching for parking is $20 per day. That is, if he parks on the sidewalk and does not get a ticket, he gets a positive payoff worth $20; if he does get a ticket, he ends up with a payoff ofarrow_forwardA wheel of fortune in a gambling casino has 54 different slots in which the wheel pointer can stop. Four of the 54 slots contain the number 9. For a 1 dollar bet on hitting a 9, if he or she succeeds, the gambler wins 10 dollars plus the return of the 1 dollar bet. What is the expected value of this gambling game? What is the meaning of the expected value result?arrow_forwardYou are taking two courses this semester, biology and chemistry. You have quizzes coming up in both classes. The table below shows your grade on each quiz for different numbers of hours studying for each quiz. For instance, the second row implies that one hour of studying for Chemistry will generate an expected grade of 73 on Chemistry, whereas one hour of studying for Biology will generate an expected grade of 75 on Biology. Hours of Study Chemistry Biology 0 65 68 1 73 75 2 79 80 3 83 83 Your goal is to maximize your average grade on the two quizzes. Use the idea of optimization in differences to decide how much time you would spend studying for each quiz if you had a total of 1, 2, or 3 hours to prepare for each exam. If you had 1 hour, you should study..... If you had 2 hours, then you should study.... hour(s) for chemistry and..... hour(s) for biology. If you had 3 hours, then you should study ..... hour(s) for chemistry and..... hour(s) for biology.…arrow_forward
- A risk-averse manager is considering two projects. The first project involves expanding the market for bologna; the second involves expanding the market for caviar. There is a 10 percent chance of a recession and a 90 percent chance of an economic boom. During a boom, the bologna project will lose $10,000, whereas the caviar project will earn $20,000. During a recession, the bologna project will earn $12,000 and the caviar project will lose $8,000. If the alternative is earning $3,000 on a safe asset (say, a Treasury bill), what should the manager do? Why?arrow_forwardLet U(x)= x^(beta/2) denote an agent's utility function, where Beta > 0 is a parameter that defines the agent's attitude towards risk. Consider a gamble that pays a prize X = 10 with probability 0.2, a price X = 50 with probability 0.4 and a price X = 100 with probability 0.4. Compute the agentís expected utility for such gamble and find the value of Beta such that the agentis risk neutral? Suppose B= 1, what is the certainty equivalent of the gamble described above? What is the Arrow-Pratt measure of absolute risk aversion?arrow_forwardObi-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.arrow_forward
- Victoria founded a start-up several years ago, together with her Macedonian friends. At first, she was fairly poor and therefore very afraid of taking risks. Any negative shock could send the company into bankruptcy. Nowadays her business is thriving, stretching across several markets from Europe to Asia. Victoria no longer worries about taking monetary risks. In fact she enjoys a good gamble over horse races from time to time. How would you draw Victoria's utility function in a way that describes her changing taste for risk as her wealth increased? Please draw a graph and comment. Please do fast ASAP fastarrow_forwardY = 30 - 25X + error What is the expected value of Y when X is 0? Y = 10 + 13.57*X + error By how much does the expected value of Y change if X increases by 18.02 units? (Round your answer to two decimal places: ex: 123.45)arrow_forwardConsider the following prospects – A: (0.5, 0, 0.5: $100, $60, $10) B: (0, 0.9, 0.1: $100, $60, $10) C: (0.2, 0.5, 0.3: $100, $60, $10) D: (0.4, 0.2, 0.4: $100, $60, $10) Show that D>A>B>C is consistent with expected utility theory and that this preference ordering implies “risk-loving” preferences. Show that C>B>D>A is consistent with the expected utility theory.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Managerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning