Study Guide for Microeconomics
9th Edition
ISBN: 9780134741123
Author: Robert Pindyck, Daniel Rubinfeld
Publisher: PEARSON
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Question
Chapter 5, Problem 1E
(a)
To determine
The expected value of the lottery.
(b)
To determine
The variance.
(c)
To determine
The payment made by a risk neutral person.
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Students have asked these similar questions
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.
A 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?
The value of a successful project is $420,000; the probabilities of success are 1/2 with good supervision and 1/4 without. The manager is risk neutral, not risk averse as in the text, so his expected utility equals his expected income minus his disutility of effort. He can get other jobs paying $90,000, and his disutility for exerting the extra effort for good supervision on your project is $100,000.
(a) Show that inducing high effort would require the firm to offer a compensation scheme with a negative base salary; that is, if the project fails, the manager pays the firm an amount stipulated in the scheme.
(b) How might a negative base salary be implemented in reality?
(c) Show that if a negative base salary is not feasible, then the firm does better to settle for the low-pay, low-effort situation.
Chapter 5 Solutions
Study Guide for Microeconomics
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