EBK INTERMEDIATE MICROECONOMICS AND ITS
12th Edition
ISBN: 9781305176386
Author: Snyder
Publisher: YUZU
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Chapter 4.3, Problem 1MQ
To determine
The bet of $100 on coin flips is an example of diversification is to be determined.
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You are evaluating the possibility that your company bids $150,000 for a particular construction job.
(a) If a bid of $150,000 corresponds to a relative bid of 1.20, what is the dollar profit that your company would make from winning the job with this bid? Show your work.
(b) Calculate an estimate of the expected profit of the bid of $150,000 for this job. Assume that, historically, 55 percent of the bids of an average bidder for this type of job would exceed the bid ratio of 1.20. Assume also that you are bidding against three other construction companies. Show your work.
2 Consider the two investments listed below with possible outcomes and probabilities:
INVESTMENT
(in $1000)
SAFE
RISKY
INVESTMENT
AMOUNTⓇ
40+
40+
GOOD
SCENARIO
OUTCOME
45+
80+
AVERAGE+
SCENARIO
PROB OUTCOME
0.40*
0.40€
42+
45+
BAD+
SCENARIO
PROB OUTCOME PROB
0.20
35+
0.20
10+
0.40€
0.40+
b)
a) Suppose I have utility function U(*) = (x)2. What is the expected utility from each investment?
Which investment will I choose, if any? Show and explain your work and provide the intuition.
c) What is the value of the risk premium for the SAFE investment? Show and explain your work and provide
the intuition.
d) What is the value of the risk premium for the RISKY investment? Show and explain your work and provide
the intuition.<
+
A manager is deciding whether to build a small or a large facility. Much depends on the future demand that thefacility must serve, and demand may be small or large. The manager knows with certainty the payoffs that willresult under each alternative, shown in the following payoff table. The payoffs (in $000) are the present values offuture revenues minus costs for each alternative in each event.What is the best choice if future demand will be low?
Chapter 4 Solutions
EBK INTERMEDIATE MICROECONOMICS AND ITS
Ch. 4.1 - Prob. 1MQCh. 4.1 - Prob. 2MQCh. 4.1 - Prob. 3MQCh. 4.2 - Prob. 1TTACh. 4.2 - Prob. 2TTACh. 4.2 - Prob. 1MQCh. 4.3 - Prob. 1TTACh. 4.3 - Prob. 2TTACh. 4.3 - Prob. 1MQCh. 4.3 - Prob. 2MQ
Ch. 4.3 - Prob. 3MQCh. 4.3 - Prob. 1.1TTACh. 4.3 - Prob. 1.2TTACh. 4.3 - Prob. 2.1TTACh. 4.3 - Prob. 2.2TTACh. 4.3 - Prob. 1.1MQCh. 4.3 - Prob. 2.1MQCh. 4.3 - Prob. 3.1MQCh. 4.4 - Prob. 1TTACh. 4.4 - Prob. 2TTACh. 4 - Prob. 1RQCh. 4 - Prob. 2RQCh. 4 - Prob. 3RQCh. 4 - Prob. 4RQCh. 4 - Prob. 5RQCh. 4 - Prob. 6RQCh. 4 - Prob. 7RQCh. 4 - Prob. 8RQCh. 4 - Prob. 9RQCh. 4 - Prob. 10RQCh. 4 - Prob. 4.1PCh. 4 - Prob. 4.2PCh. 4 - Prob. 4.3PCh. 4 - Prob. 4.4PCh. 4 - Prob. 4.5PCh. 4 - Prob. 4.6PCh. 4 - Prob. 4.7PCh. 4 - Prob. 4.8PCh. 4 - Prob. 4.9PCh. 4 - Prob. 4.10P
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