EBK MICROECONOMICS
2nd Edition
ISBN: 8220103679701
Author: List
Publisher: YUZU
expand_more
expand_more
format_list_bulleted
Question
Chapter 17, Problem 8Q
To determine
Type of risk-taker, when a coin toss can make an individual lose
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these 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.
For each of the following scenarios, determine whether the decision maker is risk neutral, risk averse, or risk loving.a) A manager prefers a 10 percent chance of receiving $1,000 and a 90 percent chance of receiving $100 to receiving $190 for sure.b) A shareholder prefers receiving $775 with certainty to a 75 percent chance of receiving $1,000 and a 25 percent chance of receiving $100.c) A consumer is indifferent between receiving $550 for sure and a lottery that pays $1,000 half of the time and $100 half of the time.
Suppose Xavier has tickets to the Super Bowl, but is terribly ill with a noncontagious infection. How would a decision maker perform his economic calculation on whether to attend the game, based on the traditional model of risk behavior?
Knowledge Booster
Similar questions
- For each of the following scenarios, determine whether the decision maker is risk neutral, risk averse, or risk loving. a. A manager prefers a 20 percent chance of receiving $1,400 and an 80 percent chance of receiving $500 to receiving $680 for sure. b. A shareholder prefers receiving $920 with certainty to an 80 percent chance of receiving $1,100 and a 20 percent chance of receiving $200. c. A consumer is indifferent between receiving $1,360 for sure and a lottery that pays $2,000 with a 60 percent probability and $400 with a 40 percent probability.arrow_forwardA 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_forwardA risk-averse manager is considering a project that will cost £100. There is a 10 percent chance the project will generate revenues of £100, an 80 percent chance it will yield revenues of £50, and a 10 percent chance it will yield revenues of £500. Should the manager adopt the project? Explain. What will a risk-neutral and risk-loving manager do in the same situation?arrow_forward
- In the field of financial management, it has been observed that there is a trade-off between the rate of return that one earns on investments and the amount of risk that one must bear to earn that return. a) Draw a set of indifference curves between risk and return for a person that is risk-averse (a person that does not like risk).arrow_forwardBPO Services is in the business of digitizing information from forms that are filled out by hand. In 2006, a big client gave BPO a distribution of the forms that it digitized in house last year, and BPO estimated how much it would cost to digitize each form. Form Type Mix of Forms Form Cost A 0.5 $3.00 B 0.5 $1.00 The expected cost of digitizing a form is . Suppose the client and BPO agree to a deal, whereby the client pays BPO to digitize forms. The price of each form processed is equal to the expected cost of the form that you calculated in the previous part of the problem. Suppose that after the agreement, the client sends only forms of type A. The expected digitization cost per form of the forms sent by the client is . This leads to an expected loss of per form for BPO. (Hint: Do not round your answers. Enter the loss as a positive number.)arrow_forwardYou 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.arrow_forward
- Consider a game where there is a $2,520 prize if a player correctly guesses the outcome of a fair 7-sided die roll.Cindy will only play this game if there is a nonnegative expected value, even with the risk of losing the payment amount.What is the most Cindy would be willing to pay?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_forwardWhen a famous painting becomes available for sale, it is often known which museum or collector will be the likely winner. Yet, the auctioneer actively woos representatives of other museums that have no chance of winning to attend anyway. Suppose a piece of art has recently become available for sale and will be auctioned off to the highest bidder, with the winner paying an amount equal to the second highest bid. Assume that most collectors know that Valerie places a value of $15,000 on the art piece and that she values this art piece more than any other collector. Suppose that if no one else shows up, Valerie simply bids $15,000/2=$7,500 and wins the piece of art. The expected price paid by Valerie, with no other bidders present, is $________.. Suppose the owner of the artwork manages to recruit another bidder, Antonio, to the auction. Antonio is known to value the art piece at $12,000. The expected price paid by Valerie, given the presence of the second bidder Antonio, is $_______. .arrow_forward
- Consider the following game 1\2 Y Z A 10,3 3,9 B 8,5 6,1 Suppose Player 2 holds the following belief about Player 1: θ1 (A,B) = (9/10,1/10) What is the expected payoff from playing ‘Y’ ? What is the expected payoff from playing ‘Z’ ? Based on these beliefs, player 2 should respond by playing _____arrow_forwardHow much is his risk on any random day due to late arrival?arrow_forwardThe 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…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 LearningEssentials of Economics (MindTap Course List)EconomicsISBN:9781337091992Author:N. Gregory MankiwPublisher:Cengage LearningBrief Principles of Macroeconomics (MindTap Cours...EconomicsISBN:9781337091985Author:N. Gregory MankiwPublisher: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
Essentials of Economics (MindTap Course List)
Economics
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Brief Principles of Macroeconomics (MindTap Cours...
Economics
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:Cengage Learning