Exam 5: Uncertainty and Consumer Behavior

Amos Long's marginal utility of income function is given as: MU(I) = , where I represents income. From this you would say that he is:

Consider two upward sloping income-utility curves with income on the horizontal axis. The steeper curve represents risk preferences that are more:

Scenario 5.3: Wanting to invest in the computer games industry, you select Whizbo, Yowzo and Zowiebo as the three best firms. Over the past 10 years, the three firms have had good years and bad years. The following table shows their performance: -Refer to Scenario 5.3. The expected revenue from all three companies combined is:

Scenario 5.3: Wanting to invest in the computer games industry, you select Whizbo, Yowzo and Zowiebo as the three best firms. Over the past 10 years, the three firms have had good years and bad years. The following table shows their performance: -Refer to Scenario 5.3. Based on the 10 years' past performance, rank the companies' expected revenue, highest to lowest.

The expected value of a project is always the:

How might department stores best protect themselves against the risk of recession?

A farmer lives on a flat plain next to a river. In addition to the farm, which is worth $F, the farmer owns financial assets worth $A. The river bursts its banks and floods the plain with probability P, destroying the farm. If the farmer is risk averse, then the willingness to pay for flood insurance unambiguously falls when:

Actual insurance premiums charged by insurance companies may exceed the actuarially fair rates because:

Scenario 5.1: Aline and Sarah decide to go into business together as economic consultants. Aline believes they have a 50-50 chance of earning $200,000 a year, and that if they don't, they'll earn $0. Sarah believes they have a 75% chance of earning $100,000 and a 25% chance of earning $10,000. -Refer to Scenario 5.1. The probabilities discussed in the information above are:

United Plastics Company produces large plastic cups in a variety of colors. United can produce plain plastic cups that are sold in department stores in inexpensive ten cup bundles. Alternatively, United can sell Novelty Cups which are imprinted with slogans and designs. The printed cups cost more to produce, but they sell for a higher price. The appropriate strategy for United depends upon the state of the economy. Plain cups do better during a recession, while Novelty Cups earn higher profits during normal economic conditions. During a recession, United will earn a $100,000 profit selling plain cups and $40,000 with the Novelty line. Under normal economic conditions, United will earn $120,000 with the plain cups and a $200,000 profit with Novelty Cups. United currently does not use economic forecasts and simply assigns equal probabilities to a recession and normal conditions. a. Using the probabilities assumed by United, what is the expected value of each alternative? Which alternative should the firm pursue? (Your recommendation should include separate recommendations for alternative attitudes toward risk.) b. Calculate and interpret the value to the firm of complete information.