please only do: if you can teach explain steps of how to solve parts after c) Consider a weather forecaster who is paid based on her performance. Each day, she forecaststhe probability q € [0, 1] that it will rain the following day. She is given a bonus that dependson her forecast and whether it rains. Assume that the forecaster knows the true probability,p, and when choosing her forecast, q, cares only about maximizing her bonus for that day (inparticular, she may lie about the probability if doing so increases her pay).(a) Suppose the bonus is equal to the percentage the forecast assigns to what actuallyhappens. For example, if the forecaster says there is a 72% chance of rain (i.e. q = 0.72),then she is paid $72 if it rains and $28 if it does not rain. If the forecaster is a riskneutral expected utility maximizer, what forecast will she make (as a function of p)?(b) Suppose instead that the bonus is equal to 100(1-(1-q)²) dollars if it rains and100(1-q²) dollars if it does not rain. For example, if the forecaster says there is an 80%chance of rain, she is paid $96 if it rains and $36 if it does not rain. If the forecaster isa risk neutral expected utility maximizer, what forecast will she make (as a function ofp)?(c) Would your answer to part (b) change if the forecaster was risk averse?(d) Now suppose that the scheme in part (b) is replaced with a randomized scheme thatpays $100 with probability (1 – (1 – q)²) if it rains, $100 with probability 1-q² if itdoes not rain, and otherwise pays $0. For example, if the forecaster says there is an 80%chance of rain, she has a 96% chance of getting $100 and a 4% chance of getting nothingif it rains, and she has a 36% chance of getting $100 and a 64% chance of getting nothingif it does not rain. If the forecaster is a risk neutral expected utility maximizer, whatforecast will she make (as a function of p)?(e) Would your answer to part (d) change if the forecaster was risk averse?

Probability of Rain = p Probability of no rain = (1 - p ) Expected Value = Value *Probability…

Consider a weather forecaster who is paid based on her performance. Each day, she forecasts the probability q € [0, 1] that it will rain the following day. She is given a bonus that depends on her forecast and whether it rains. Assume that the forecaster knows the true probability, p, and when choosing her forecast, q, cares only about maximizing her bonus for that day (in particular, she may lie about the probability if doing so increases her pay). (a) Suppose the bonus is equal to the percentage the forecast assigns to what actually happens. For example, if the forecaster says there is a 72% chance of rain (i.e. q = 0.72), then she is paid $72 if it rains and $28 if it does not rain. If the forecaster is a risk neutral expected utility maximizer, what forecast will she make (as a function of p)? (b) Suppose instead that the bonus is equal to 100(1 – (1 − q)²) dollars if it rains and

Consider a weather forecaster who is paid based on her performance. Each day, she forecasts the probability q € [0, 1] that it will rain the following day. She is given a bonus that depends on her forecast and whether it rains. Assume that the forecaster knows the true probability, p, and when choosing her forecast, q, cares only about maximizing her bonus for that day (in particular, she may lie about the probability if doing so increases her pay). (a) Suppose the bonus is equal to the percentage the forecast assigns to what actually happens. For example, if the forecaster says there is a 72% chance of rain (i.e. q = 0.72), then she is paid $72 if it rains and $28 if it does not rain. If the forecaster is a risk neutral expected utility maximizer, what forecast will she make (as a function of p)? (b) Suppose instead that the bonus is equal to 100(1 – (1 − q)²) dollars if it rains and

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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