Exam 5: Uncertainty and Consumer Behavior

Reginald enjoys hunting whitetail deer. He has a dilemma of deciding each morning where to locate his hunting stand. Reginald would like to choose the location that gives him the deer with the highest Pope and Young score in the smallest amount of time. Reginald will also kill the first deer he sees that offers any Pope and Young score. His utility is a function of the Pope and Young score (b), time in minutes spent hunting (t) and wealth in dollars (w) and is given by If Reginald chooses stand A, he will kill a deer with Pope and Young score of 120 in 300 minutes. If Reginald chooses stand B, he will kill a deer with a Pope and Young score of 190 in 480 minutes. In dollars, how much would Reginald be willing to give up to learn of the outcomes from each stand?

Figure 5.2.3 -The individual pictured in Figure 5.2.3:

George Steinbrenner, the owner of the New York Yankees, has a utility function of wins in a season given by Mr. Steinbrenner has been offered a trade. He believes if he completes the trade, his probability of winning 125 games is 15%. There is also an 85% chance the team won't gel and the Yankees will win only 90 games. Without the trade, Mr. Steinbrenner believes the Yankees will win 94 games. Given Mr. Steinbrenner's risk attitude, will he complete the trade?

The law of large numbers:

A risk-averse individual has:

Scenario 5.4: Suppose an individual is considering an investment in which there are exactly three possible outcomes, whose probabilities and payoffs are given below: The expected value of the investment is $25. Although all the information is correct, information is missing. -Refer to Scenario 5.4. What is the standard deviation of the investment?

A person with a diminishing marginal utility of income:

As president and CEO of MegaWorld industries, you must decide on some very risky alternative investments: The highest expected return belongs to investment:

The variance of an investment opportunity:

Calculate the expected value of the following game. If you win the game, your wealth will increase by 100,000,000 times your wager. If you lose, you lose your wager amount. The probability of winning is .

Scenario 5.2: Randy and Samantha are shopping for new cars (one each). Randy expects to pay $15,000 with 1/5 probability and $20,000 with 4/5 probability. Samantha expects to pay $12,000 with 1/4 probability and $20,000 with 3/4 probability. -Refer to Scenario 5.2. Randy's expected expense for his car is:

Consider the following information about job opportunities for new college graduates in Megalopolis:Table 5.1 -Refer to Table 5.1. A risk-averse student making a decision solely on the basis of the above information:

The expected value is a measure of:

The budget line in portfolio analysis shows that:

A risk-averse individual prefers:

Figure 5.4.2 -Refer to Figure 5.4.2 above. In this figure, there are two investors, A nd B. Which investor is more risk averse?

Dante has two possible routes to travel on a business trip. One is more direct but more exhausting, taking one day but with a probability of business success of 1/4. The second takes three days, but has a probability of success of 2/3. If the value of Dante's time is $1000/day, the value of the business success is $12,000, and Dante is risk neutral,

The individual pictured in Figure 5.2.2:

John Brown's utility of income function is U = log(I+1), where I represents income. From this information you can say that:

Which of these is NOT a generally accepted means of reducing risk?