2. Consider the following market for used cars. The set of possible quality types is given by the interval (0, s), with each type having the same probability. Any car's true quality is known only by its seller. Each seller values their car at 015, yet may choose instead to sell the car for p. Buyers expect to receive 02u -p if they purchase, and 0 if they do not purchase, where u is the buyer's expectation of quality. a) Under what circumstances should trade take place? Explain. b) Determine, given any p, a buyer's anticipation of quality, u. c) Given your answer to b), determine the condition which describes a buyer's purchase decision given any price. Under what circumstances can market trade occur?

2. Consider the following market for used cars. The set of possible quality types is given by the interval (0, s), with each type having the same probability. Any car's true quality is known only by its seller. Each seller values their car at 015, yet may choose instead to sell the car for p. Buyers expect to receive 02u -p if they purchase, and 0 if they do not purchase, where u is the buyer's expectation of quality. a) Under what circumstances should trade take place? Explain. b) Determine, given any p, a buyer's anticipation of quality, u. c) Given your answer to b), determine the condition which describes a buyer's purchase decision given any price. Under what circumstances can market trade occur?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Suppose that there is asymmetric information in the market for used cars. Sellers know the quality of the car that they are selling, but buyers do not. Buyers know that there is a 30% chance of getting a "lemon", a low quality used car. A high quality used car is worth $30,000, and a low quality used car is worth $15.000. Based on this probability, the most that a buyer would be willing to pay for a used car is S. (Enter your response rounded to the nearest dollar.)
7. Consider an individual whose utility function over money is u(w) = 1+2w. (a) Is the individual risk-averse, risk-neutral, or risk-loving? Does it depend on w? (b) Suppose the individual has initial wealth ¥W and faces the possible loss of Y. The probability that the loss will occur is . Suppose insurance is available at price p, where p is not necessarily the fair price. Find the optimal amount of insurance the individual should buy. You may assume that the solution is interior. (c) Is there a price at which the individual will not want to buy any insurance? If so, find it. If no, explain.
A buyer wants to purchase a house from a seller. Let v be the quality of this house. The quality v is known to the seller but unobservable to the buyer. The buyer thinks the chance that v=$1k is 20%, v=$10k is 40%, and v=$50k is 40%. The seller’s valuation of the house is v and the buyer’s valuation of the house is 2v a) Suppose both the buyer and the seller see the value of v . Also suppose the transaction price equals the value of v (i.e. if =10k, then the buyer pays 10k for the house). Calculate the buyer’s expected profit before seeing the value of b) Suppose only the seller sees v. Also suppose the buyer is allowed to make any offer to the seller and the seller accepts it if the offered price is above or equals to v. What is the buyer’s profit maximizing offer? What is the buyer’s maximum profit? c) Base on your answers from (a) and (b), what is the value of information (i.e. the benefits of seeing the value of ) to the buyer?
4. Kate has von Neumann-Morgenstern utility function U(x1,x2) = m7. She currently has $2025. a. Would she be willing to undertake a gamble that involves a gain $2875 with probability + and a loss of $1125 with probability ? Show your work and explain your answer. b. Would she be willing to undertake a gamble that involves a gain $2599 with probability and a loss of $800 with probability ? Show your work and explain your answer.
In a large casino, the house wins on its blackjack tables with a probability of 50.9%. All bets at blackjack are 1 to 1, which means that if you win, you gain the amount you bet, and if you lose, you lose the amount you bet. a. If you bet $1 on each hand, what is the expected value to you of a single game? What is the house edge? b. If you played 150 games of blackjack in an evening, betting $1 on each hand, how much should you expect to win or lose? c. If you played 150 games of blackjack in an evening, betting $3 on each hand, how much should you expect to win or lose? d. If patrons bet $7,000,000 on blackjack in one evening, how much should the casino expect to earn? a. The expected value to you of a single game is $ (Type an integer or a decimal.)
Suppose the equilibrium price for good quality used cars is $20,000. And the equilibrium price for poor quality used cars is $10,000. Assume a potential used car buyer has imperfect information as to the condition of any given used car. Assume this potential buyer believes the probability a given used car is good quality is .60 and the probability a given used car is low quality is .40. Assume the seller has perfect information on all cars in inventory. How does the informational imbalance result in market failure? a. Only good quality cars are sold, hence the market under-provides used cars. b. Both poor and good quality cars are sold, hence the market over-provides used cars. c. Only poor quality cars are sold, hence the market under-provides used cars. d. Both poor and good quality cars are sold, hence the market efficiently provides used cars.
16. The market consists of only two assets, A and B, with normally distributed re- turns. Asset A's returns have a mean of 18% and a standard deviation of 14% and Asset B's returns have a mean of 15% and a standard deviation of 18%. In such a scenario a risk-averse investor would always want to invest all of her money in Asset A. 17. A call option offers the purchaser limited downside loss as given by the option premium paid, combined with limited upside potential. 18. The return earned on a risk free portfolio must be equal to the risk free interest rate. 19. CAPM assumes that all investors' optimal portfolio has a fraction invested in the risk-free asset and the remaining in the minimum variance portfolio. 20. For any frontier portfolio p, except the minimum variance portfolio, there exists a unique frontier portfolio with which p has zero covariance. 21. The market portfolio of all available assets is the supply of risky assets. 22. An arbitrage opportunity is an…
buy? 20 None of the answers is correct. 3 80 40 40 3 The decision maker has utility function U(z) = 2 ln(2). With 50% probability x-20 and with 50% x 100. The decision maker can buy insurance. For each unit of insurance they buy the get $1 if x-20 realizes. A unit of insurance costs $0.75. How many units of insurance does the decision maker buy? 80/3 40 40/3 20 None of the answers is correct. O
An insurance company estimates that drivers have a 5% chance of getting into an accident that will cost the driver $10,000. There are two types of drivers: the ones with $50,000 in the bank and the ones with only $5,000. In case of an accident those with $5,000 will declare bankruptcy and creditors can only recover $5,000. What is the fair pair of insurance and will those with $5,000 in the bank buy it? Why?
help please answer in text form with proper workings and explanation for each and every part and steps with concept and introduction no AI no copy paste remember answer must be in proper format with all working
Choice under uncertainty. Consider a coin-toss game in which the player gets $30 if they win, and $5 if they lose. The probability of winning is 50%. (a) Alan is (just) willing to pay $15 to play this game. What is Alan’s attitude to risk? Show your work.(b) Assume a market with many identical Alans, who are all forced to pay $15 to play this coin-toss game. An insurer offers an insurance policy to protect the Alans from the risk. What would be the fair (zero profit) premium on this policy? i need help with question B please.
Consider an individual with an expected utility function of the form u(w) = √wwhere wrep-resents this individual’s wealth. This individual currently has wealth of $100. This individualfaces a risk of losing $64 with a probability of (1/2). The maximum price that this individualwould pay for insurance that covers the entire $64 loss is?