Identify the expected income.

Question

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Answer 1

Question

Chapter 20, Problem 1SPA

(a)

To determine

Identify the expected income.

(a)

Expert Solution

Explanation of Solution

In the given case, there is a 50% chance to make $4,000 in a month and another 50% chance to make nothing. Therefore, the expected income of L can be calculated as follows:

Expected income=(Probaility1×Income1)+(Probaility2×Income2)=(0.5×$4,000)+(0.5×$0)=$2,000

Thus, the expected income of L is $2,000.

Economics Concept Introduction

Expected income: Expected income is the money value that of what a person expects to own at a given point of time.

(b)

To determine

Identify the expected utility.

(b)

Expert Solution

Explanation of Solution

The given graph shows that when the income is $4,000, the corresponding utility is 100; when the income is $0, then the corresponding utility is also 0. Now the expected utility can be calculated as follows:

Expected utility=(Probaility1×Utility1)+(Probaility2×Utility2)=(0.5×$100)+(0.5×$0)=50

Thus, the expected utility of L is 50.

Economics Concept Introduction

Expected income: Expected income is the money value of what a person expects to own at a given point in time.

(c)

To determine

Identify the amount that is offered by another firm with certainty to persuade L not to take the risky sales job.

(c)

Expert Solution

Explanation of Solution

The given graph shows that the expected utility of L is 50. The corresponding wealth in the graph along the x-axis is $1,250. Hence, L would have to be offered about $1,250 a month with certainty to persuade L not to take the risky sales job.

Economics Concept Introduction

Expected income: Expected income is the money value of what a person expects to own at a given point in time.

(d)

To determine

Identify the cost of risk.

(d)

Expert Solution

Explanation of Solution

The cost of risk is the difference between the expected income and the certain income offered by the other firms to persuade L not to take the risky sales job. Thus, the cost of risk can be calculated as follows;

Cost of income=Expected income−Certain income=$2,000−$1,250=$750

The amount of the cost of risk is $750.

Economics Concept Introduction

Cost of risk: The cost of risk is found by comparing the expected wealth in a given risky situation with the wealth that gives the same utility with no risk.

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4. A taproom owner is trying to determine how to structure his manager's compensation. One option he considers is a flat salary of $70,000 per year. The second option is a base salary of $30,000 plus 15% of the taproom's profit. If the manager puts a lot of effort into her job, the taproom's annual profit will be $500,000 with 75% probability and $100,000 with 25% probability. If the manager exerts only modest effort, the taproom's profit will be $500,000 with 25% probability and $100,000 with 75% probability. The manager's opportunity cost of putting a lot of effort into her job is $50,000, while her opportunity cost of exerting only modest effort is $25,000. a. Draw the game tree for the interaction between the taproom owner and the manager. Assume that the taproom owner moves first. b. What is the equilibrium outcome for this game? What kind of contract should the taproom owner offer? What level of effort will the manager choose? Explain.

Answer 2

Question

Chapter 20, Problem 1SPA

(a)

To determine

Identify the expected income.

(a)

Expert Solution

Explanation of Solution

In the given case, there is a 50% chance to make $4,000 in a month and another 50% chance to make nothing. Therefore, the expected income of L can be calculated as follows:

Expected income=(Probaility1×Income1)+(Probaility2×Income2)=(0.5×$4,000)+(0.5×$0)=$2,000

Thus, the expected income of L is $2,000.

Economics Concept Introduction

Expected income: Expected income is the money value that of what a person expects to own at a given point of time.

(b)

To determine

Identify the expected utility.

(b)

Expert Solution

Explanation of Solution

The given graph shows that when the income is $4,000, the corresponding utility is 100; when the income is $0, then the corresponding utility is also 0. Now the expected utility can be calculated as follows:

Expected utility=(Probaility1×Utility1)+(Probaility2×Utility2)=(0.5×$100)+(0.5×$0)=50

Thus, the expected utility of L is 50.

Economics Concept Introduction

Expected income: Expected income is the money value of what a person expects to own at a given point in time.

(c)

To determine

Identify the amount that is offered by another firm with certainty to persuade L not to take the risky sales job.

(c)

Expert Solution

Explanation of Solution

The given graph shows that the expected utility of L is 50. The corresponding wealth in the graph along the x-axis is $1,250. Hence, L would have to be offered about $1,250 a month with certainty to persuade L not to take the risky sales job.

Economics Concept Introduction

Expected income: Expected income is the money value of what a person expects to own at a given point in time.

(d)

To determine

Identify the cost of risk.

(d)

Expert Solution

Explanation of Solution

The cost of risk is the difference between the expected income and the certain income offered by the other firms to persuade L not to take the risky sales job. Thus, the cost of risk can be calculated as follows;

Cost of income=Expected income−Certain income=$2,000−$1,250=$750

The amount of the cost of risk is $750.

Economics Concept Introduction

Cost of risk: The cost of risk is found by comparing the expected wealth in a given risky situation with the wealth that gives the same utility with no risk.

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Answer 3

Question

Chapter 20, Problem 1SPA

(a)

To determine

Identify the expected income.

(a)

Expert Solution

Explanation of Solution

In the given case, there is a 50% chance to make $4,000 in a month and another 50% chance to make nothing. Therefore, the expected income of L can be calculated as follows:

Expected income=(Probaility1×Income1)+(Probaility2×Income2)=(0.5×$4,000)+(0.5×$0)=$2,000

Thus, the expected income of L is $2,000.

Economics Concept Introduction

Expected income: Expected income is the money value that of what a person expects to own at a given point of time.

(b)

To determine

Identify the expected utility.

(b)

Expert Solution

Explanation of Solution

The given graph shows that when the income is $4,000, the corresponding utility is 100; when the income is $0, then the corresponding utility is also 0. Now the expected utility can be calculated as follows:

Expected utility=(Probaility1×Utility1)+(Probaility2×Utility2)=(0.5×$100)+(0.5×$0)=50

Thus, the expected utility of L is 50.

Economics Concept Introduction

Expected income: Expected income is the money value of what a person expects to own at a given point in time.

(c)

To determine

Identify the amount that is offered by another firm with certainty to persuade L not to take the risky sales job.

(c)

Expert Solution

Explanation of Solution

The given graph shows that the expected utility of L is 50. The corresponding wealth in the graph along the x-axis is $1,250. Hence, L would have to be offered about $1,250 a month with certainty to persuade L not to take the risky sales job.

Economics Concept Introduction

Expected income: Expected income is the money value of what a person expects to own at a given point in time.

(d)

To determine

Identify the cost of risk.

(d)

Expert Solution

Explanation of Solution

The cost of risk is the difference between the expected income and the certain income offered by the other firms to persuade L not to take the risky sales job. Thus, the cost of risk can be calculated as follows;

Cost of income=Expected income−Certain income=$2,000−$1,250=$750

The amount of the cost of risk is $750.

Economics Concept Introduction

Cost of risk: The cost of risk is found by comparing the expected wealth in a given risky situation with the wealth that gives the same utility with no risk.

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Answer 4

Question

Chapter 20, Problem 1SPA

(a)

To determine

Identify the expected income.

(a)

Expert Solution

Explanation of Solution

In the given case, there is a 50% chance to make $4,000 in a month and another 50% chance to make nothing. Therefore, the expected income of L can be calculated as follows:

Expected income=(Probaility1×Income1)+(Probaility2×Income2)=(0.5×$4,000)+(0.5×$0)=$2,000

Thus, the expected income of L is $2,000.

Economics Concept Introduction

Expected income: Expected income is the money value that of what a person expects to own at a given point of time.

(b)

To determine

Identify the expected utility.

(b)

Expert Solution

Explanation of Solution

The given graph shows that when the income is $4,000, the corresponding utility is 100; when the income is $0, then the corresponding utility is also 0. Now the expected utility can be calculated as follows:

Expected utility=(Probaility1×Utility1)+(Probaility2×Utility2)=(0.5×$100)+(0.5×$0)=50

Thus, the expected utility of L is 50.

Economics Concept Introduction

Expected income: Expected income is the money value of what a person expects to own at a given point in time.

(c)

To determine

Identify the amount that is offered by another firm with certainty to persuade L not to take the risky sales job.

(c)

Expert Solution

Explanation of Solution

The given graph shows that the expected utility of L is 50. The corresponding wealth in the graph along the x-axis is $1,250. Hence, L would have to be offered about $1,250 a month with certainty to persuade L not to take the risky sales job.

Economics Concept Introduction

Expected income: Expected income is the money value of what a person expects to own at a given point in time.

(d)

To determine

Identify the cost of risk.

(d)

Expert Solution

Explanation of Solution

The cost of risk is the difference between the expected income and the certain income offered by the other firms to persuade L not to take the risky sales job. Thus, the cost of risk can be calculated as follows;

Cost of income=Expected income−Certain income=$2,000−$1,250=$750

The amount of the cost of risk is $750.

Economics Concept Introduction

Cost of risk: The cost of risk is found by comparing the expected wealth in a given risky situation with the wealth that gives the same utility with no risk.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 20, Problem 1SPA

(a)

To determine

Identify the expected income.

(a)

Expert Solution

Explanation of Solution

In the given case, there is a 50% chance to make $4,000 in a month and another 50% chance to make nothing. Therefore, the expected income of L can be calculated as follows:

Expected income=(Probaility1×Income1)+(Probaility2×Income2)=(0.5×$4,000)+(0.5×$0)=$2,000

Thus, the expected income of L is $2,000.

Economics Concept Introduction

Expected income: Expected income is the money value that of what a person expects to own at a given point of time.

(b)

To determine

Identify the expected utility.

(b)

Expert Solution

Explanation of Solution

The given graph shows that when the income is $4,000, the corresponding utility is 100; when the income is $0, then the corresponding utility is also 0. Now the expected utility can be calculated as follows:

Expected utility=(Probaility1×Utility1)+(Probaility2×Utility2)=(0.5×$100)+(0.5×$0)=50

Thus, the expected utility of L is 50.

Economics Concept Introduction

Expected income: Expected income is the money value of what a person expects to own at a given point in time.

(c)

To determine

Identify the amount that is offered by another firm with certainty to persuade L not to take the risky sales job.

(c)

Expert Solution

Explanation of Solution

The given graph shows that the expected utility of L is 50. The corresponding wealth in the graph along the x-axis is $1,250. Hence, L would have to be offered about $1,250 a month with certainty to persuade L not to take the risky sales job.

Economics Concept Introduction

Expected income: Expected income is the money value of what a person expects to own at a given point in time.

(d)

To determine

Identify the cost of risk.

(d)

Expert Solution

Explanation of Solution

The cost of risk is the difference between the expected income and the certain income offered by the other firms to persuade L not to take the risky sales job. Thus, the cost of risk can be calculated as follows;

Cost of income=Expected income−Certain income=$2,000−$1,250=$750

The amount of the cost of risk is $750.

Economics Concept Introduction

Cost of risk: The cost of risk is found by comparing the expected wealth in a given risky situation with the wealth that gives the same utility with no risk.

Answer 6

Chapter 20, Problem 1SPA

(a)

To determine

Identify the expected income.

(a)

Expert Solution

Explanation of Solution

In the given case, there is a 50% chance to make $4,000 in a month and another 50% chance to make nothing. Therefore, the expected income of L can be calculated as follows:

Expected income=(Probaility1×Income1)+(Probaility2×Income2)=(0.5×$4,000)+(0.5×$0)=$2,000

Thus, the expected income of L is $2,000.

Economics Concept Introduction

Expected income: Expected income is the money value that of what a person expects to own at a given point of time.

Answer 7

Chapter 20, Problem 1SPA

(a)

To determine

Identify the expected income.

Answer 8

(a)

Expert Solution

Explanation of Solution

In the given case, there is a 50% chance to make $4,000 in a month and another 50% chance to make nothing. Therefore, the expected income of L can be calculated as follows:

Expected income=(Probaility1×Income1)+(Probaility2×Income2)=(0.5×$4,000)+(0.5×$0)=$2,000

Thus, the expected income of L is $2,000.

Answer 9

(a)

Expert Solution

Answer 10

(a)

Expert Solution

Answer 11

Expert Solution

Answer 12

Economics Concept Introduction

Expected income: Expected income is the money value that of what a person expects to own at a given point of time.

Answer 13

(b)

To determine

Identify the expected utility.

(b)

Expert Solution

Explanation of Solution

The given graph shows that when the income is $4,000, the corresponding utility is 100; when the income is $0, then the corresponding utility is also 0. Now the expected utility can be calculated as follows:

Expected utility=(Probaility1×Utility1)+(Probaility2×Utility2)=(0.5×$100)+(0.5×$0)=50

Thus, the expected utility of L is 50.

Economics Concept Introduction

Expected income: Expected income is the money value of what a person expects to own at a given point in time.

Answer 14

(b)

To determine

Identify the expected utility.

Answer 15

(b)

Expert Solution

Explanation of Solution

The given graph shows that when the income is $4,000, the corresponding utility is 100; when the income is $0, then the corresponding utility is also 0. Now the expected utility can be calculated as follows:

Expected utility=(Probaility1×Utility1)+(Probaility2×Utility2)=(0.5×$100)+(0.5×$0)=50

Thus, the expected utility of L is 50.

Answer 16

(b)

Expert Solution

Answer 17

(b)

Expert Solution

Answer 18

Expert Solution

Answer 19

Economics Concept Introduction

Expected income: Expected income is the money value of what a person expects to own at a given point in time.

Answer 20

(c)

To determine

Identify the amount that is offered by another firm with certainty to persuade L not to take the risky sales job.

(c)

Expert Solution

Explanation of Solution

The given graph shows that the expected utility of L is 50. The corresponding wealth in the graph along the x-axis is $1,250. Hence, L would have to be offered about $1,250 a month with certainty to persuade L not to take the risky sales job.

Economics Concept Introduction

Expected income: Expected income is the money value of what a person expects to own at a given point in time.

Answer 21

(c)

To determine

Identify the amount that is offered by another firm with certainty to persuade L not to take the risky sales job.

Answer 22

(c)

Expert Solution

Explanation of Solution

The given graph shows that the expected utility of L is 50. The corresponding wealth in the graph along the x-axis is $1,250. Hence, L would have to be offered about $1,250 a month with certainty to persuade L not to take the risky sales job.

Answer 23

(c)

Expert Solution

Answer 24

(c)

Expert Solution

Answer 25

Expert Solution

Answer 26

Economics Concept Introduction

Expected income: Expected income is the money value of what a person expects to own at a given point in time.

Answer 27

(d)

To determine

Identify the cost of risk.

(d)

Expert Solution

Explanation of Solution

The cost of risk is the difference between the expected income and the certain income offered by the other firms to persuade L not to take the risky sales job. Thus, the cost of risk can be calculated as follows;

Cost of income=Expected income−Certain income=$2,000−$1,250=$750

The amount of the cost of risk is $750.

Economics Concept Introduction

Cost of risk: The cost of risk is found by comparing the expected wealth in a given risky situation with the wealth that gives the same utility with no risk.

Answer 28

(d)

To determine

Identify the cost of risk.

Answer 29

(d)

Expert Solution

Explanation of Solution

The cost of risk is the difference between the expected income and the certain income offered by the other firms to persuade L not to take the risky sales job. Thus, the cost of risk can be calculated as follows;

Cost of income=Expected income−Certain income=$2,000−$1,250=$750

The amount of the cost of risk is $750.

Answer 30

(d)

Expert Solution

Answer 31

(d)

Expert Solution

Answer 32

Expert Solution

Answer 33

Economics Concept Introduction

Cost of risk: The cost of risk is found by comparing the expected wealth in a given risky situation with the wealth that gives the same utility with no risk.