Eunice, the industry analyst of H&M, wants to determine the propensity of Major Clothing companies toward risk. She was able to determine the utility distribution of H&M, Uniqlo and Dickies. For H&M, If the expected payoff of a venture is a loss of 125,000, the utility value is 0.00, if a loss of 75,000, the utility value is .2, if breakeven, the utility value is .5, if gain of 75,000 .8 and if gain of 125,000 utility value is 1. For Uniqlo, if loss of 125,000 utility value is 0, if loss of 75,000 utility value is .1, breakeven is .4, if a gain of 75,000, utility value is .7 and if gain of 125,000 utility value is 1. For Dickies, if loss of 125,000, utility value is 0, if loss of 75,000, utility value is .3 breakeven is .6, if gain of 75,000, utility value is .9 and gain of 125,000, utility value is 1. What is the propensity to risk of the three internet companies? Explain your graph.

Eunice, the industry analyst of H&M, wants to determine the propensity of Major Clothing companies toward risk. She was able to determine the utility distribution of H&M, Uniqlo and Dickies. For H&M, If the expected payoff of a venture is a loss of 125,000, the utility value is 0.00, if a loss of 75,000, the utility value is .2, if breakeven, the utility value is .5, if gain of 75,000 .8 and if gain of 125,000 utility value is 1. For Uniqlo, if loss of 125,000 utility value is 0, if loss of 75,000 utility value is .1, breakeven is .4, if a gain of 75,000, utility value is .7 and if gain of 125,000 utility value is 1. For Dickies, if loss of 125,000, utility value is 0, if loss of 75,000, utility value is .3 breakeven is .6, if gain of 75,000, utility value is .9 and gain of 125,000, utility value is 1. What is the propensity to risk of the three internet companies? Explain your graph.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter18: Asymmetric Information

Section: Chapter Questions

Problem 18.1P

See similar textbooks

Similar questions

Consider a medieval Italian merchant who is a risk averse expected utility maximiser. Their wealth will beequal to y if their ship returns safely from Asia loaded with the finest silk. If the ship sinks, their incomewill be y − L. The chance of a safe return is 50%. Now suppose that there are two identical merchants, A and B, who are both risk averse expected utilitymaximisers with utility of income given by u(y) = ln y. The income of each merchant will be 8 if theirown ship returns and 2 if it sinks. As previously, the probability of a safe return is 50% for each ship.However, with probability p ≤ 1/2 both ships will return safely. With the same probability p both willsink. Finally, with the remaining probability, only one ship will return safely.(iv) Compute the increase in the utility of each merchant that they could achieve from pooling theirincomes (as a function of p). How does the benefit of pooling depend on the probability p? Explainintuitively why this is the case.
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?
Consider the oil-drilling game depicted in Figure 5.4 in which payoffs are in millions of dollars. Suppose that this game is played repeatedly and the probability that the game will end in the next round is 10 percent and the discount rate is 25 percent. What is the present value of the stream of payoffs from not cooperating? GLOMAR Narrow Wide PETROX Narrow (52, 52) (20, 108) Wide (108, 20) (24, 24) Payoffs: (PETROX, GLOMAR) FIGURE 5.4 An amount between $85.7 and $85.8 million. An amount between $113.7 and $113.8 million. O An amount between $185.7 and $185.8 million. O An amount between $210.8 and $210.9 million.
A risk-neutral plaintiff in a lawsuit must decide whether to settle a claim or go to trial. The defendants offer $50,000 to settle now. If the plaintiff does not settle, the plaintiff believes that the probability of winning at trial is 50% if the plaintiff wins, the amount awarded to the plaintiff is X Will the plaintif settle if x is $62,500? What if X-$250,000? What is the critical value of X that would make the plaintiff indifferent between setting and going to trial? it the plaintiff were risk averse instead of risk neutral, would this critical value of X be higher or lower? If the amount to be awarded at trial with a win (X) were $62,500, then the plaintiff would settle If the amount to be awarded at trial with a win (X) were $250,000, then the plaintiff would not settle The critical value of X that would make the plaintiff indifferent between settling and going to trial is $ (Enter your response using rounded to wo decimal places)
please very very urgent Given the utility function, U(X)=ln(X) where X > 0, with initial consumption C=30000. Calculate the risk premium for a fair game with a chance of loosing -20000 is 0.5? (Hint: Start with the "fair game" definition)
For questions 32 - 35 consider the following "research and development" game. Firms A and B are contemplating whether or not to invest in R8D. Each has two options: "Invest" and "Abstain." A firm that invests will invent product X with a probability of 0.5, whereas a firm that abstains is incapable of invention. Investment costs $6. If a firm doesn't invent X. it makes 50 in revenue. If a firm invests and is the only one to invent X. it becomes a monopolist and generates $20 in revenue. If both firms invent X, each firm becomes a duopolist, and generates $8 in revenue. Revenues are gross figures (i.e. they are not net of investment costs), and there are no costs besides investments costs (i.e. no variable cost of production etc.). The firms are risk-neutral entities, and are uninformed of each other's investment decisions. Find the Nash Equilibrium (or Equilibria) of the "research and development" game. There are no Nash Equilibria Invest/Invest Invest/Abstain, and Abstain/Invests…
For questions 32 - 35 consider the following "research and development" game. Firms A and B are contemplating whether or not to invest in R8D. Each has two options: "Invest" and "Abstain." A firm that invests will invent product X with a probability of 0.5, whereas a firm that abstains is incapable of invention. Investment costs $6. If a firm doesn't invent X. it makes 50 in revenue. If a firm invests and is the only one to invent X. it becomes a monopolist and generates $20 in revenue. If both firms invent X, each firm becomes a duopolist, and generates $8 in revenue. Revenues are gross figures (i.e. they are not net of investment costs), and there are no costs besides investments costs (i.e. no variable cost of production etc.). The firms are risk-neutral entities, and are uninformed of each other's investment decisions. Find the Nash Equilibrium (or Equilibria) of the "research and development" game. A. There are no Nash Equilibria B. Invest/Invest C. Invest/Abstain, and…
Person D is offered a the same game, for a price of £1.8. They decide are indifferent between participating in the game and not participating. What can be inferred about their risk preference and the shape of their utility function? You will only receive marks for this question if you tick all correct solutions and do not tick any wrong solutions. risk averse; concave risk averse; convex risk neutral; flat risk neutral; lihear risk loving, convex risk loving, concave
A risk-averse agent, Andy, has power utility of consumption with riskaversion coefficient γ = 0.5. While standing in line at the conveniencestore, Andy hears that the odds of winning the jackpot in a new statelottery game are 1 in 250. A lottery ticket costs $1. Assume his income isIt = $100. You can assume that there is only one jackpot prize awarded,and there is no chance it will be shared with another player. The lotterywill be drawn shortly after Andy buys the ticket, so you can ignore therole of discounting for time value. For simplicity, assume that ct+1 = 100even if Andy buys the ticket How large would the jackpot have to be in order for Andy to play thelottery? b) What is the fair (expected) value of the lottery with the jackpot youfound in (a)? What is the dollar amount of the risk premium that Andyrequires to play the lottery? Solve for the optimal number of lottery tickets that Andy would buyif the jackpot value were $10,000 (the ticket price, the odds of winning,and Andy’s…
Scenario 4: Suppose an individual is considering an investment in which there are exactly three possible outcomes, whose probabilities and payoffs are given below: Outcome Payoffs $100 Probability A. 0.3 ? 50 0.2 The expected value of the investment is $25. Although all the information is correct, information is missing. Refer to Scenario 4. What is the probability of outcome B? O A. 0.2 O B. 0 - 0.5 O D. 0.5 O E. 0.4
Suppose that the consumer is asked to contemplate a gamble with a probability of 60% of winning Birr 10,000 with a utility of 10 utils, and a 40% probability of winning Birr 15,000 with a utility of 12 utils. A. What will be the expected income and expected utility of the consumer? B. If the utility of this consumer from a risk free alternative which gives him an income equal to the expected income of the risky alternative given above is equal to 11 utils, is this consumer risk lover or risk averse? Why? Illustrate your answer with the help of a diagram
a. Mayers & Smith Corp. has a fertilizer plant. The probability of an explosion at the plant depends on how much the firm spends on safety as given by the table below. If an explosion occurs, the loss to society (damaged equipment, death of employees, etc.) is expected to be $250 million. Safety Expenditure $ millions) 0.0 0.5 1.0 1.5 2.0 2.5 Probability of Loss 0.030 0.020 0.016 0.013 0.011 0.010 Find the optimal level of safety from a societal perspective correct calculation of marginal cost and marginal benefit;: correct optimal amount.