Decisions Involving Uncertainty - End of Chapter ProblemYou are considering investing $2,000 in the stock market. If you invest, there is a 30% probability that your investment will beworth $3,000 in one month. There is a 70% probability that your investment will be worth $1,500 in one month. Alternatively,if you did not invest, you simply keep the $2,000.If you decide to invest,☐ you are risk-neutral.you are risk-loving.it is impossible to tell whether you are risk-averse, risk-neutral, or risk-loving.☐ you are risk-averse.

When you are risk-loving, you tend to take the risk despite the lower chances of profiting from that…

Answered: Decisions Involving Uncertainty - End…

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter19: The Basic Tools Of Finance

Section19.2: Managing Risk

Problem 2QQ

See similar textbooks

Similar questions

You are considering a $500,000 investment in the fast-food industry and have narrowed your choice to either a McDonald's or a Penn Station East Coast Subs franchise. McDonald's indicates that, based on the location where you are proposing to open a new restaurant, there is a 25 percent probability that aggregate 10-year profits (net of the initial investment) will be $16 million, a 50 percent probability that profits will be $8 million, and a 25 percent probability that profits will be -$1.6 million. The aggregate 10-year profit projections (net of the initial investment) for a Penn Station East Coast Subs franchise is $48 million with a 2.5 percent probability, $8 million with a 95 percent probability, and -$48 million with a 2.5 percent probability. Considering both the risk and expected profitability of these two investment opportunities, which is the better investment? Explain carefully.
Economics Shawn's consumption is subject to risk. With probability 0.75 he will enjoy 10000 in consumption, but with probability 0.25 he will have only 3600. His utility function for consumption is given by v(c) = Vc. -What is the expected value of Shawn's consumption? -What is his expected utility? -What is his certainty equivalent of having 10000 with probability 0.75 and 3600 with probability 0.25?
Sam, after taking a $200 loan from the bank to finance an investment that pays $1000 50% of the time and $0 50% of the time at a 100% interest, discovers another riskier investment that pays out $5,000 but only 10% of the time, while the other 90% of the time it pays zero. Would the he want to switch to the riskier investment? Question 4 options: Yes because his return has increased No because his liability to the bank has increased No because his return has decreased None of the above
You have $1,000 that you can invest. If you buy Ford stock, you face the following returns and probabilities from holding the stock for one year: with a probability of 0.2 you will get $1,500; with a probability of 0.4 you will get $1,100; and with a probability of 0.4 you will get $900. If you put the money into the bank, in one year’s time you will get $1,100 for certain. a) What is the expected value of your earnings from investing in Ford stock? b) Suppose you are risk-averse. Can we say for sure whether you will invest in Ford stock or put your money into the bank?
2. Kier, in The scenario, wants to determine how each of the 3 companies will decide on possible new investments. He was able to determine the new investment pay off for each of the three choices as well as the probability of the two types of market. If a company will launch product 1, it will gain 50,000 if the market is successful and lose 50,000 if the market is a failure. If a company will launch product 2, it will gain 25,000 if the market is successful and lose 25,000 if the market will fail. If a company decides not to launch any of the product, it will not be affected whether the market will succeed or fail. There is a 56% probability that the market will succeed and 44% probability that the market will fail. What will be the companies decision based on EMV? What is the decision of each company based on expected utility value?
Lukas is a risk-averse farmer. He grows barley on his 1000 acre farm. In a typical year his farm yields 100 bushels of barley per acre. However, in a wet season, the farm only yields 40 bushels per acre. The probability of a typical season is 0.8 and of a wet season is 0.2. Regardless of the productivity of his farm, he expects to earn $3 per bushel (net of all costs of farming). Assume that Lukas has no other income. Write an expression for Lukas's expected utility.
A new company is offering its shares for sale in an initial public offering (IPO) through an auction. There is a 50% probability that the company will be very successful, in which case each share is worth $28. Otherwise, each share is worth $0. You are competing with professional investors such as hedge funds that know if the company will be successful or not. Part 1If you bid $14 per share, what is your expected return?
Utility Theory You live in an area that has a possibility of incurring a massive earthquake, so you are considering buyingearthquake insurance on your home at an annual cost of $180. The probability of an earthquake damagingyour home during one year is 0.001. If this happens, you estimate that the cost of the damage (fully coveredby earthquake insurance) will be $160,000. Your total assets (including your home) are worth $250,000. A. Apply Bayes’ decision rule to determine which alternative (take the insurance or not) maximizes yourexpected assets after one year.
What does it mean to be Risk Averse?
Johnny is "paid" by his parents $2o if he gets a grade A, $10 if he gets a grade B, whereas he has to pay his parents back $5 if he gets a grade other than A or B. On average 20% of the grades he gets are A, and 30% are grades B. What is the expected value of what he "earns" per grade ? What is the expected value of what he "earns" at school weekly if on average he gets five grades a week ? How long should Jim save until he collects enough money to buy a pair of brand new Hi-Fi headphones that cost $225?
Questions 18 through 20 refer to the following information: Shawn's consumption is subject to risk. With probability 0.75 he will enjoy 10000 in consumption, but with probability 0.25 he will have only 3600. His utility function for consumption is given by v(c) = vc. Question 18 What is the expected value of Shawn's consumption? Question 19 What is his expected utility?
Tasha is planning to invest in a farming project in 2022, but has a reservation given the different forecast (declined (D),the average (A) and takeoff (T)of the economy. She uses the following to guide her decision making. (i) there is 25% chance she will invest if there is a forecast of declined (ii) there is a 75% chance she will invest if there is a forecast of average growth and (iii) there is a 55% chance of investing if there is a forecast that economy will takeoff. Tashanna believes that for 2022 there is a 20% chance of decline and a 40% chance of average growth and a 40% chance the economy will take off. Based on these probabilities what is the chance that Tattiana will invest in the farming project if the stated forecast hold?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials of Economics (MindTap Course List)

Economics

ISBN:

9781337091992

Author:

N. Gregory Mankiw

Publisher:

Cengage Learning

Brief Principles of Macroeconomics (MindTap Cours…

Economics

ISBN:

9781337091985

Author:

N. Gregory Mankiw

Publisher:

Cengage Learning

Microeconomics

Economics

ISBN:

9781337617406

Author:

Roger A. Arnold

Publisher:

Cengage Learning

Essentials of Economics (MindTap Course List)

Economics

ISBN:

9781337091992

Author:

N. Gregory Mankiw

Publisher:

Cengage Learning

Brief Principles of Macroeconomics (MindTap Cours…

Economics

ISBN:

9781337091985

Author:

N. Gregory Mankiw

Publisher:

Cengage Learning

Microeconomics

Economics

ISBN:

9781337617406

Author:

Roger A. Arnold

Publisher:

Cengage Learning

Economics (MindTap Course List)

Economics

ISBN:

9781337617383

Author:

Roger A. Arnold

Publisher:

Cengage Learning

SEE MORE TEXTBOOKS