You need to hire some new employees to staff your startup venture. You know that potential employees are distributed throughout the population as follows, but you can't distinguish among them: Employee Value Probability $30,000 0.25 $47,000 0.25 $64,000 0.25 $81,000 0.25 The expected value of hiring one employee is $ Suppose you set the salary of the position equal to the expected value of an employee. Assume that employees will not work for a salary below their employee value. T The expected value of an employee who would apply for the position, at this salary, is Given this adverse selection, your most reasonable salary offer (that ensures you do not lose money) is

You need to hire some new employees to staff your startup venture. You know that potential employees are distributed throughout the population as follows, but you can't distinguish among them: Employee Value Probability $30,000 0.25 $47,000 0.25 $64,000 0.25 $81,000 0.25 The expected value of hiring one employee is $ Suppose you set the salary of the position equal to the expected value of an employee. Assume that employees will not work for a salary below their employee value. T The expected value of an employee who would apply for the position, at this salary, is Given this adverse selection, your most reasonable salary offer (that ensures you do not lose money) is

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Sophie is offered a performance based wage that will either be equal to $4,200 or to $3,600, each with a probability of 50%. Sophie says that getting $3,900 for certain would be as good as being offered that random wage. Which, of the following sentences, is true? options: Sophie is risk averse and her risk premium is zero. Sophie is risk neutral and her risk premium is zero. Sophie is risk averse and her risk premium is $300. Sophie is risk neutral and her risk premium is $300.
Rice farming is risky and generates expected income of $100. The certainty equivalent associated with rice farming will be greater than $100 for a risk averse individual and less than $100 for a risk loving individual. True or False
Find the Pratt - Arrow risk - aversion function for a utility function U(W) = log(0.5-W + 500), where W is the amount of wealth in €. Suppose that an investor's wealth is subject to outcomes -800 €, 500 €, 500 € and 1, 000 € which affect the initial amount of 2,500 € with probabilities of their occurrence 40%, 15%, 15% and 30%, respectively. a) Using the Taylor approximation to certainty equivalent, calculate an approximate expected utility value. b) Calculate the certain equivalent of the investor's uncertain wealth. Interpret.
Consider two prospects. Problem 1: Choose between Prospect A: $2,500 with probability 0.33 $2,400 with probability 0.66 Zero with probability 0.01 Prospect B: $2,400 with probability 1.00 Problem 2: Choose between Prospect C: $2,500 with probability 0.33 Zero with probability 0.67 Prospect D: $2,400 with probability 0.34 Zero with probability 0.66 It has been shown by Daniel Kahneman and Amos Tversky (1979, “Prospect theory: An analysis of decision under risk,” Econometrica 47(2), 263-291) that more people choose B when presented with problem 1 and when presented with problem 2, most people choose C. These choices violate expected utility theory. Why?
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Setup from Question 1) An expected utility maximiser owns a car worth £60 000 and has a bank account with £20 000. The money in the bank is safe, but there is a 50% probability that the car will be stolen. The utility of wealth for the agent is u(y) = In(y) and they have no other assets. Question 2)
In the Hawaiian Beach Boy surf board vendor scenario, what if the fine was increased to $190 but the probability of a fine decreased to one in 20 days, 5%? What would be the expected value – Exp(RS) -- of continuing to rent surfboards? Assume the other numbers stay the same. He makes $300/day and to rent boards from friends costs him $100 a day. So, he makes $200 a day. Write out the expected value formula, plug in the numbers, and show the math. Hint: the Exp(RS) should be higher than the previously calculated $160.
A wheel of fortune in a gambling casino has 54 different slots in which the wheel pointer can stop. Four of the 54 slots contain the number 9. For a 1 dollar bet on hitting a 9, if he or she succeeds, the gambler wins 10 dollars plus the return of the 1 dollar bet. What is the expected value of this gambling game? What is the meaning of the expected value result?
Clancy has difficulty finding parking in his neighborhood and, thus, is considering the gamble of illegally parking on the sidewalk because of the opportunity cost of the time he spends searching for parking. On any given day, Clancy knows he may or may not get a ticket, but he also expects that if he were to do it every day, the average amount he would pay for parking tickets should converge to the expected value. If the expected value is positive, then in the long run, it will be optimal for him to park on the sidewalk and occasionally pay the tickets in exchange for the benefits of not searching for parking. Suppose that Clancy knows that the fine for parking this way is $100, and his opportunity cost (OC) of searching for parking is $20 per day. That is, if he parks on the sidewalk and does not get a ticket, he gets a positive payoff worth $20; if he does get a ticket, he ends up with a payoff of
Suppose 1,250 raffle tickets are being sold for $5 each. One ticket will be chosen to receive a cash prize of $2,500, and three tickets will be chosen to recelve cash prizes of $500. Let x be the amount of money won/lost by purchasing one raffle ticket. Find the expected value for . (Round your answer to the nearest penny. Do not include as sign in your answer. Your answer may be positive or negative.)
Leo needs one unit of capital from a bank to launch a business. His profits depend on the interest rate of the contract r and the level of effort. Leo can either put high effort in the project, in which case his profits 7 equal y -r with probability 1/2 and 0 with probability 1/2. H | Leo incurs a cost of high effort c=2- Otherwise Leo can put low effort, in which case his profits 7 equals y,-r with probability 1/3 and 0 with probability 2/3. Leo incurs a cost of low effort L c=0: %3D Leo's utility function is 271/2- c where A represents his profits and c the cost of efforts. For a given an interest rate r, the risk-neutral bank receives r if the entrepreneur is successful or -1 if he is not. The bank knows that there are many entrepreneurs like Leo who either make high or low effort. It then proposes two types of loans. The first loan is designed for entrepreneurs who make high effort, with an interest rate r=r,. The second loan is designed for entrepreneurs who make low effort, with…
David is an expected-utility maximizer that likes to drive fast (and reckless at times), so his probability of an accident is 2/3. David's preferences over wealth are u(w) = vw. Suppose that David's initial wealth is $100. If David has an accident, he incurs a $51 loss. How much is the risk premium David willing to pay to be as well off in case of accident or not?