Exam 5: Uncertainty and Consumer Behavior

Irene's utility of income function is U(I)= 20I + 300.Irene is offered the following game of chance.The odds of winning are ¹/₁₀₀ and the pay-off is 75 times the wager.If she loses,she loses her wager amount.Calculate Irene's expected utility of the game.

Table 5.4 -Refer to Table 5.4.If at Job B the $20 outcome occurs with probability .2,and the $50 outcome occurs with probability .8,then in absolute value

Farmer Brown grows wheat on his farm in Kansas,and the weather during the growing season makes this a risky venture.Over the many years that he has been in business,he has learned that rainfall patterns can be categorized as highly productive (HP)with a probability of .2,moderately productive (MP)with a probability of .6,and not productive at all (NP)with a probability of .2.With these various rainfall patterns,he has also learned that the inflation adjusted yields are $25,000 with NP weather,$10,000 with MP weather,and $50,000 with HP weather.Calculate the expected yield from growing wheat on Farmer Brown's farm.What can be learned about Brown's attitude toward risk from this problem? Explain.

Blanca would prefer a certain income of $20,000 to a gamble with a 0.5 probability of $10,000 and a 0.5 probability of $30,000.Based on this information:

What would best explain why a generally risk-averse person would bet $100 during a night of blackjack in Las Vegas?

In Eugene,Oregon,next year there is a 2% chance of an earthquake severe enough to destroy all buildings and personal property.Quincy,who has $3,000,000 in buildings and personal property,has the opportunity to purchase complete earthquake insurance.Which is true?

Table 5.4 -Refer to Table 5.4.If outcomes 1 and 2 are equally likely at Job A,then in absolute value

Mel and Christy are co-workers with different risk attitudes.Both have investments in the stock market and hold U.S.Treasury securities (which provide the risk free rate of return).Mel's marginal rate of substitution of return for risk where R_P is the individual's portfolio rate of return and σP is the individual's portfolio risk.Christy's Each co-worker's budget constraint is where R_j is the risk-free rate of return,R_m is the stock market rate of return,and σ_m is the stock market risk.Solve for each co-worker's optimal portfolio rate of return as a function of R_j,R_m and σ_m.

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.Samantha's expected expense for her car is

Daring Dora holds 90% of her assets in high-technology stocks,earning 12%,and 10% in long-term government bonds,earning 6%.The expected return on her portfolio

Consider the following statements when answering this question; I.The variance of the returns of an investor's portfolio can be reduced by selling assets from the portfolio,and investing the proceeds in other assets where returns are positively correlated with the portfolio's remaining assets. II.The value of complete information is always positive.

Steve has received a stock tip from Monica.Monica has told him that XYZ Corp.will increase in value by 100%.Steve believes that Monica has a 25% chance of being correct.If Monica is incorrect,Steve expects the value of XYZ Corp.will fall by 50%.What is Steve's expected utility from buying $1,000 worth of XYZ Corp.stock? Steve's utility of income is U(I)= 50I.Should Steve purchase the stock?

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 5.4: Suppose an individual is considering an investment in which there are exactly three possible outcomes,whose probabilities and pay-offs 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?

The variance of an investment opportunity:

Sam's utility of wealth function is U(w)= 15 .Sam owns and operates a farm.He is concerned that a flood may wipe out his crops.If there is no flood,Sam's wealth is $360,000.The probability of a flood is 1/15.If a flood does occur,Sam's wealth will fall to $160,000.Calculate the risk premium Sam is willing to pay for flood insurance.

A risk-averse individual prefers

The weighted average of all possible outcomes of a project,with the probabilities of the outcomes used as weights,is known as the

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,

In figure below,what is true about the two jobs?