You are a hotel manager and you are considering four projects that yield different payoffs, depending upon whether there is an economic boom or a recession. The potential payoffs and corresponding payoffs are summarized in the accompanying table. Project Boom (50%) Recession (50%) A $ 20 -$ 10 $ 20 -$ 30 -$ 50 B -$ 10 $ 30 $ 50 C A risk-neutral manager will prefer project
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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.A lottery system has balls numbered 1 to 65 and randomly selects 6 of the lottery balls. There is only one prize of $ 10,000,000.00 which is awarded only it a lottery player selects the correct set of 6 lottery balls. a) If a lottery ticket costs $ 5.00, what is a lottery player's expected value? b) How much would the lottery prize have to be worth if it was to be a fair game? (Note: Include dollar signs in your answer)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.< +
- (8 points) A taxpayer (of a particular profile) can either comply with the IRS code, orcheat and receive some benefit. The IRS can either audit the taxpayer at a cost or donothing. If the taxpayer cheats and the IRS audits then the tax payer faces penalty (fineplus possibly jail time) and the IRS receives the fine. The payoff matrix:IRSAudit (q) Not Audit (1-q)Cheat (p) -50000, 4000 1000, 0Tax PayerComply (1-p) -500, -300 0, 0Assume the tax payer cheats with probability p and complies with probability 1 − p, andIRS audits with probability q and does not audit with probability 1 − q. Find the mixedstrategy Nash equilibrium. Express probabilities in percentage forms and keep two digitsafter the decimal point, for example p = 2.34%.An oil company is considering drilling in the Gulf at a current cost of $400,000 with an expected profit of $500,000 in three years. The current market rate of interest is 10 percent. Should the company make the investment? Multiple Choice No, the present value of the profit is less than the present value of the cost.. No, the future value of the profit is less than the present value of the cost. Yes, the present value of the profit is greater than the present value of the cost.. Yes, the future value of the profit is greater than the present value of the cost.1. Suppose a company can select among two decisions (d1 and d2) and face three states of nature (s1, s2 and s3) with the following payoff table: Decision s1 s2 s3 d1 d2 150 200 200 50 200 500 The probabilities of s1, s2, and s3 are unknown. Using the optimistic approach, what is the optimal decision and what is the value of the payoff? Place the optimal decision in the first answer box and the maximum payoff used to arrive at this decision in the second. Question 6 options: 2. Suppose a company can select among two decisions (d1 and d2) and face three states of nature (s1, s2 and s3) with the following payoff table: Decision s1 s2 s3 d1 d2 150 200 200 50 200 500 The probabilities of s1, s2, and s3 are unknown. Using the conservative approach, what is the optimal decision and what is the value of the payoff? Place the optimal decision in the first answer box and the maximum payoff used to derive this solution in the second. Question 7 options: 8 3. Suppose a company must consider two…
- 5. Shift-in-charge Nazar Al Rushdy: Nazar is pessimistic about the market price. What is your guidance for Nazar? The decision to employ decision trees in crucial situations has been taken by Salem Al Harthi, the plant manager. The table below presents data on demand for a duration of 6 hours along with their respective probabilities. The first row of the table provides the probability of demand for the initial three hours when a leak occurs, denoted in parentheses. Subsequently, the following three rows indicate the probabilities of high, medium, and low demand for the succeeding three hours. To illustrate, if the initial 3-hour market price was low, the probabilities of high demand, medium demand, and low demand in the next three hours are 0.2, 0.3, and 0.5, respectively. Market price High Market price Medium Initial 3-hrs (0.2) Initial 3-hrs (0.5) Market price Low Initial 3-hrs (0.3) High demand (next (0.5) (0.4) (0.2) 3 hrs) Medium demand (0.3) (0.2) (0.3) (next 3 hours) Low demand…2 Scenario Your client, InsureCorp, is an insurance company considering launching an 'income insur- ance' product in the nation of Motherland. Income insurance is a product that fully insures a household against changes in income caused by a major injury or illness. At present, no businesses are selling income insurance products in Motherland. Initial market research suggests that there are 15,000 households in Motherland interested in purchasing income insurance. Your client expects that the fixed cost of launching the income insurance product will be $25,000,000 per year, and that each policy issued to a customer will cost the company an additional $2,000 in sales commissions. 2.1 Your task Your client wants you to analyse the potential market for income insurance and report on the following: What is the maximum price the company can charge a household for an income insurance policy? What is the expected profit (or loss) for the company if it becomes a monopoly provider of income…A friend offers you a chance to play a game in which there are only two outcomes, each with equal probability. If you get the "good" outcome, you win $80. But if you get the bad outcome, you only win $20. What price to play would make this a fair game (fair bet)? Carefully follow all mathematical instructions in your answer.
- A risk-neutral firm produces chemical products, and its objective is to maximize expected profit. There is a risk that there will be an accident during the production process, and dangerous chemical products will be released into the ocean, polluting the water. To reduce the risk of an accident, the firm can choose Low or High investment in safety. Low Investment in Safety_ Cost for firm= $0 Probability of an Accident = 80% Probability of No Accident =20% High Investment in Safety Cost for firm= $150 Probability of an Accident = 20% Probability of No Accident = 80% The Government wants to reduce the risk of an accident, but the Government cannot observe the fir m's investment in safety. Therefore there is a moral hazard problem. However, the Government can observe whether an accident occurred or not. So the government decides to create a fine (penalty): if an accident occurs, the firm must pay a fine F to the Government. If an accident does not occurs, then the firm does not have to…1 . Individual Problems 17-2 You're a contestant on a TV game show. In the final round of the game, if contestants answer a question correctly, they will increase their current winnings of $3 million to $4 million. If they are wrong, their prize is decreased to $2,250,000. You believe you have a 25% chance of answering the question correctly. Ignoring your current winnings, your expected payoff from playing the final round of the game show is . Given that this is , you play the final round of the game. (Hint: Enter a negative sign if the expected payoff is negative.) The lowest probability of a correct guess that would make the guessing in the final round profitable (in expected value) is . (Hint: At what probability does playing the final round yield an expected value of zero?)Samantha Ross is the procurement manager for the headquarters of a large Financial company chain with a central inventory operation. Ross’ quick-moving inventory item has a demand of 7,000 units per year. Each unit cost $120, and the inventory holding cost is $15 per unit per year. The average ordering cost is $31 per order. It takes about 6 days for an order to arrive. (This is a corporate operation, and there are 250 working days per year.) a) What is the average inventory if the EOQ is used? b) What is the optimal number of orders per year?