Study Guide for Microeconomics
9th Edition
ISBN: 9780134741123
Author: Robert Pindyck, Daniel Rubinfeld
Publisher: PEARSON
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Question
Chapter 5, Problem 3E
(a)
To determine
The expected value of the lottery and the variance.
(b)
To determine
The decision regarding the purchase of the ticket.
(c)
To determine
The smallest amount at which R would be willing to sell 1000 tickets.
(d)
To determine
The state policy about the lottery.
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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:
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If Burger Prince was risk neutral, how much would they be willing to pay for fire insurance?
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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.
Consider a lottery with three possible outcomes: $100 will be received with probability .1, $50 with probability .2, and $10 with probability .7.
What is the expected value of the lottery?
What is the variance of the outcomes of the lottery?
What would a risk-neutral person pay to play the lottery?
Chapter 5 Solutions
Study Guide for Microeconomics
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