CONNECT F/MICROECONOMICS
21st Edition
ISBN: 9781259915741
Author: McConnell
Publisher: MCG
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Chapter 8, Problem 3RQ
To determine
Heuristics and biases.
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Now suppose agent C can produce private information about the true realization x at t=1 at the cost γ=4. Suppose lA=lB=φA=φB=1 and x is either 40 or 100 with equal probability and w=70. - At t=1, agent B owns the bond. What is the maximum amount LB that agent B can borrow with probability 1?- At t=0, what amount LA can agent A borrow from agent B in a repo trade at t=0 and what is the haircut in equilibrium?
Abdul’s utility function is given by U A 5 M A 2 y M B , where M A is Abdul’s wealth level and M B is Benjamin’s wealth level. Benjamin’s utility function is given by (LO1) U B 5 M B 2 y M A . Suppose M A 5 M B 5 10 initially, and suppose there is a joint project that Ab dul and Benjamin can undertake that will generate an additional 10 units of wealth to divide between them. The project is neither pleasant nor unpleasant. What is the minimum payment Abdul must be given to secure his agreement to perform the project? What is the minimum payment Benjamin must be given? Will they perform the project? (LO1)
**Practice**
suppose that many insurance companies sell contracts of the following format:- The insurance premium P is the same for everyone in this market, regardless of the value of their cell phone. That’s because regulations prevent the companies from charging different premiums based on cell phone value.
- If the cell phone is stolen, they get the value of the phone back (that is, Anne would get$700 from the insurance company if her phone were stolen, and Bob would get $600)
Assume that the insurance companies are all risk-neutral and that market is competitive, and so the contract is such that the insurance companies have zero profits. Also assume that 50% of consumers in the market are identical to Anne, and 50% are identical to Bob. What is the actuarially fair premium and who buys the full insurance plan?a. The actuarially fair premium is 260 and only Bob buys itb. The actuarially fair premium is 130 and both Anne and Bob buy itc.The actuarially fair premium is 180 and both…
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CONNECT F/MICROECONOMICS
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- **Practice** suppose that many insurance companies sell contracts of the following format: - The insurance premium P is the same for everyone in this market, regardless of the value of their cell phone. That’s because regulations prevent the companies from charging different premiums based on cell phone value.- If the cell phone is stolen, they get the value of the phone back (that is, Anne would get $700 from the insurance company if her phone were stolen, and Bob would get $600) Assume that the insurance companies are all risk-neutral and that market is competitive, and so the contract is such that the insurance companies have zero profits. Also assume that 50% of consumers in the market are identical to Anne, and 50% are identical to Bob. Continue assuming that the insurance companies are risk-neutral and competitive, but now instead of assuming that the risks are correlated instead of independent. Specifically, suppose that with probability 0.2, a bandit group raids the city and…arrow_forward(Bets as insurance) Suppose that P1 = P2 = P, that P(Y = 1) = P(Y = 2) = ½, that if Y (ω) = 1, then (W1, W2)(ω) = (1, 0), and that if Y (ω) = 2, then (W1, W2)(ω) = (0, 1). Show that if u1 and u2 are strictly concave, increasing expected utility functions, there are acceptable bets making both strictly better off. Show that this is not true if u1 and u2 are linear.arrow_forward"Companies should use investment entry modes whenever possible because they offer the greatest control over business operations." Do you agree or disagree with this statement? Are there times when other market entry modes offer greater control? How (if at all) do you think a company's product influences the choice of entry mode? Cite the example of 2 products that would influence the choice of entry mode in a different way.arrow_forward
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- . Wood, the receiver of Stanton Oil Company, suedStanton’s shareholders to recover dividends paid to themfor three years, claiming that at the time these dividendswere declared, Stanton was in fact insolvent. Wood didnot allege that the present creditors were also creditorswhen the dividends were paid. Were the dividendswrongfully paid? Explainarrow_forwardMa3. The payoff matrix below shows the payoffs for Stefan and Imani in a two strategy game. In the mixed strategy equilibrium, Stefan will play strategy Up with a probability of 1/5 and strategy Down with a probability of 4/5, and Imani will play strategy Left with a probability of 2/5 and strategy Right with a probability of 3/5. What is Stefan's expected payoff in the mixed strategy equilibrium? 10.6 5 4.56 10.4arrow_forwardSuppose that, holding yield constant, investors are indifferent as to whether they hold bonds issued by the federal govemment or bonds issued by state and local governments (that is, they consider the bonds the same with respect to default risk, information costs, and liquidity) Suppose that state governments have issued perpetuities (or consoles) with $78 coupons and that the federal govemment has also issued perpetuities with $78 coupons. If the state and federal perpetuites both have after-tax yields of 8%, what are their pre-tax yields? (Assume that the relevant federal income tax rate is 31.13%) * The pre-tax yield on the state perpetuity will be______________% * The pre-tax yield on the federal perpetuity will be_______________%arrow_forward
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