Suppose that there is asymmetric information in the market for used cars. Sellers know the quality of the car that they are selling, but buyers do not. Buyers know that there is a 30% chance of getting a "lemon", a low quality used car. A high quality used car is worth $30,000, and a low quality used car is worth $15,000. Based on this probability, the most that a buyer would be willing to pay for a used car is $___
Q: An investor considers investing $17,000 in the stock market. He believes that the probability is…
A: Probability tells us the approximate chance of things taking place. It basically briefs us about the…
Q: True/False a. Consider a strategic game, in which player i has two actions, a and b. Let s−i be…
A: Since you have posted multiple questions, we will answer the first two questions for you. If you…
Q: Find the values of Absolute Risk Aversion (ARA) and Relative Risk Aversion (RRA) for all the cases…
A: Recall that, coefficient of Absolute risk aversion is given by: -∂2U∂C2∂U∂C coefficient of…
Q: An entrepreneur has a venture that will make either $100M or $0. The chance that this venture will…
A: Answer (A) If the entrepreneur tries hard her expected utility is
Q: A monthly pass for the Stockholm subway costs $100, and fare dodgers who are caught face a fine of…
A: Since there are multiple parts to this question, we are answering the first two for you. Given, A…
Q: Good drivers have a 32% chance, and bad drivers have a 68% chance of getting into an accident. A car…
A: Given Probability that a bad driver have a chance of accident = 68% p(accident)=0.68q(not having…
Q: "Jay, a writer of novels, just has completed a new thriller novel. A movie company and a TV network…
A: The table below summarizes the given results-
Q: Suppose that there are two types of entrepreneur: skilled and unskilled. Skilled entrepreneurs have…
A:
Q: A driver's wealth $100,000 includes a car of $20,000. To install a car alarm costs the driver…
A: The Von Neumann–Morgenstern utility function is an extension of consumer preference theory that…
Q: Suppose that the First United Bank of America has two loans. Each is due to be repaid one period…
A: Credit enhancement is a method for strengthening a company's credit risk profile, generally in order…
Q: Suppose in a given state's new insurance marketplace, with community rating and no restrictions on…
A: When one of the insurers is allowed to charge any premium to the people and also allowed to exclude…
Q: Consider Bob's decision problem: Sunny Cloudy Rainy Beach 2 3 2 Park 3 3 2 Mall -1 1 x Suppose…
A: An expected utility maximiser may be a theoretical agent that examines its actions, calculates the…
Q: Consider the following Bayesian game. Player 1 can be of type t e {4, 6) where Pr(t = 4) = 0.6.…
A: A Bayesian game is one in which the outcomes of player interactions are modelled using Bayesian…
Q: opening 2018 World Cup odds against being the winning team specified by espn.com were 9/2 for…
A: It is known that the formula to compute the odds for the winning team is: Odds against =Number of…
Q: Suppose that a person maximizes his expected utility, with the utility function given by v(z) = z12.…
A: We have two value of Z with equal probability. Which means Z can take 2 different values with…
Q: Recent news reports have found that, despite high vaccination rates, around 40% of new positive…
A: Probability: It refers to a situation under which it is stated that how much an outcome will occur.…
Q: Suppose the market for auto insurance is made of up two types of buyers: high-risk and low-risk.…
A: The willingness to pay refers to the highest price the buyer will willingly pay. The willingness to…
Q: There are 100 producers of webcams. Fifty of them are bad manufacturers who make unreliable webcams,…
A: The anticipated average value for some investment at some point in the future is given by the…
Q: If the farmer uses pesticides he expects a crop of 60,000 bushels; if he does not use pesticides he…
A: It is given that when a farmer uses the pesticides, he expects a crop of 60,000 bushels and when not…
Q: If the farmer uses pesticides he expects a crop of 60,000 bushels; if he does not use pesticides he…
A: We will answer the first question since the exact one was not specified. Please submit a new…
Q: If the farmer uses pesticides he expects a crop of 60,000 bushels; if he does not use pesticides he…
A: Without pesticides,profit Profit=total revenue-total cost Total revenue=50000*10=500000 Total…
Q: Historical data indicates that only 35% of cable customers are willing to switch companies. If a…
A: A capable person able to switch i.e. P = 35% n = 12
Q: You need to hire some new employees to staff your startup venture. You know that potential employees…
A: When an employer does not know the full value an employee will add when they join, but the employee…
Q: In the game of blackjack as played in casinos in Las Vegas, Atlantic City, and Niagara Falls, as…
A: Here, p = probability of winning hand p = 0.45 q = (1 - p) q = (1 - 0.45) q = 0.55
Q: Insurance: An insurance company sells a l-year term life insurance policy to an 84-year-old man. The…
A: Given Insurance premium =$1600 The probability that the 84-year old man will be alive 1 year later…
Q: In homes without working fire alarms, the chance of dying in a non-confined home fire is .0164 if…
A: Solution:-∗Economics is the study of human behaviour since it uses scientific methods it is…
Q: Player 2 L 1,0 0,1 Player 1 0,1 1,0 Suppose Player 2 is using the following strategy: she plays L…
A: In-game theory, there are many distinct sorts of tactics, and they all revolve around the player's…
Q: 1) company. If the company does well, the investor will make a 200% profit in her investment, but if…
A: Profitability: Profitability is the basic objective of all commercial endeavors. The firm will not…
Q: An individual has 40,000 in income per year. The person will get sick with probability 0.1. If he…
A: Given, Income if person does not get sick = M = 40,000 Utility (M) = 200 Probability of getting sick…
Q: Donna just paid $800 for a new iPhone. Apple offers a two year extended warranty for $200 and Donna…
A: here we can find the minimum probability and Donna Decision as follow-
Q: A man purchased a $22,500, 1-yr term-life insurance policy for $695. Assuming that the probability…
A: The expected return (or expected gain) on a financial investment is the expected value of its return…
Q: son is trying to sell cars. The number of cars that she will sell depends on her eno "e" and her…
A: Utility maximization is an essential plan by which individuals and companies look to accomplish the…
Q: A construction company needs to move lumber onto the roof of a building. If the lumber falls and…
A: P(A) denotes the probability of accident.Damage caused by accident = $1,200,000The amount paid for…
Q: Bob earn 60,000 a year and an accounting firm each year he receives Reyes Bob has determined that…
A: The expectation of an event happening is the sum of the product of its value by the probability. In…
Q: If the farmer uses pesticides he expects a crop of 60,000 bushels; if he does not use pesticides he…
A: Using pesticides would ensure more profitability to farmer because he would sell 10000 extra bushels…
Q: If the farmer uses pesticides he expects a crop of 60,000 bushels; if he does not use pesticides he…
A: Price=$11 Quantity without pesticides=55000 Price * quantity=total revenue 11 * 55000=605000
Q: You inherited your uncle's bakery in a rem family, but you prefer to keep your job and hired a local…
A: The principal-agent problem occurs mainly on account of contrary interests of different players in…
Q: "Jay, a writer of novels, just has completed a new thriller novel. A movie company and a TV network…
A: Small Box-Office:The probability of small box-office earning = 0.27Earnings = $210,000Probability of…
Q: If the farmer uses pesticides he expects a crop of 60,000 bushels; if he does not use pesticides he…
A: Expected revenue would be Price=$11 Quantity=60000 Price * quantity 11 * 60000=660000
Q: Consider Akerlov's lemons problem. Suppose that there are two types of used cars high-quality cars…
A: Adverse selection is a form of asymmetric information, which is an information failure caused when…
Q: Suppose that there is asymmetric information in the market for used cars. Sellers know the quality…
A: Asymmetric information refers to the situation when any of the trading partners has relatively more…
Q: Tonight at 7pm a professional basketball game featuring the Golden State Warriors and the Washington…
A: Since Yang believes that he is making a fair bet, expected value from his lottery should be x. If…
Q: You need to hire some new employees to staff your start-up venture. You know that potential…
A: The expected value can be calculated using the following equation.
Q: "Jay, a writer of novels, just has completed a new thriller novel. A movie company and a TV network…
A: Small Box-Office Earning:The probability of small box-office earning = 0.27Earnings =…
Q: Brown’s TV Production is considering producing a pilot for a comedy series for a major network.…
A: Maximum amount Brown will be willing to pay will be the difference between the expected value of…
Q: Mr. Smith can cause an accident, which entails a monetary loss of $1000 to Ms. Adams. The likelihood…
A: Answer a) If Mr. Smith and Ms. Adams choose a high precautionExpected loss = 0.1*1000 + 200…
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
- Suppose that there is asymmetric information in the market for used cars. Sellers know the quality of the car that they are selling, but buyers do not. Buyers know that there is a 30% chance of getting a "lemon", a low quality used car. A high quality used car is worth $30,000, and a low quality used car is worth $15.000. Based on this probability, the most that a buyer would be willing to pay for a used car is S. (Enter your response rounded to the nearest dollar.)Suppose the equilibrium price for good quality used cars is $20,000. And the equilibrium price for poor quality used cars is $10,000. Assume a potential used car buyer has imperfect information as to the condition of any given used car. Assume this potential buyer believes the probability a given used car is good quality is .60 and the probability a given used car is low quality is .40. Assume the seller has perfect information on all cars in inventory. If the seller sells the buyer a poor quality car, what is the net-benefit to the seller? a. A net gain of $6,000. b. A net loss of $20,000. c. A net loss of $6,000. d. A net gain of $10,000.Suppose the equilibrium price for good quality used cars is $20,000. And the equilibrium price for poor quality used cars is $10,000. Assume a potential used car buyer has imperfect information as to the condition of any given used car. Assume this potential buyer believes the probability a given used car is good quality is .60 and the probability a given used car is low quality is .40. Assume the seller has perfect information on all cars in inventory. What is the expected price by the buyer? a. $20,000 b. $16,000 c. $12,000 d. $4,000
- A government policy aimed at protecting people against the risk of adverse events is calledConsider the following example. A risk-neutral worker can choose high or low effort. The manager cannot observe the worker's action, but the manager can observe the realized revenue for the firm (either $100 or $200). The worker has an outside option of 0. The probability of each revenue depends on the worker's effort: Low effort: cost of effort : $0 probability of low revenue ($100): 75% probability of high revenue ($200) : 25% High effort: cost of effort : $15 probability of low revenue ($100): 25% probability of high revenue ($200) : 75% The manager offers a contract which gives the worker 25% of revenue. Given this payment scheme, the worker will put in (is/is not) ✓incentive compatible. The firm's expected profit is $ The firm is considering an investment that would increase worker morale. By making work more enjoyable, the program would reduce the worker's cost of effort from $15 to $13. If it costs the firm $20 to implement this program, the firm's expected profit if they…Consider the following example. A risk-neutral worker can choose high or low effort. The worker's outside option is 0. The manager cannot observe the worker's action, but the manager can observe the realized revenue for the firm (either $100 or $200). The probability of each revenue depends on the worker's effort: Low effort: cost of effort : $0 probability of low revenue ($100): 75% probability of high revenue ($200) : 25% High effort: cost of effort : $11 probability of low revenue ($100): 25% probability of high revenue ($200) : 75% The manager offers a contract which gives the worker a flat wage of $10 and a bonus of $20 if revenue is high. Given this payment scheme, the worker will put in ✓effort. The contract (is/is not) ✓incentive compatible. The firm's expected profit is $ The firm is considering an investment that would increase worker morale. By making work more enjoyable, the program would reduce the worker's cost of effort from $11 to $9. If it costs the firm $20 to…
- A principal is considering hiring a lawyer to represent him or her in a lawsuit. The principal gets $ 250 000 if the suit is won and $0 otherwise. If the agent works hard (100 hours), there is a 50% chance that the principal will win the suit. If the agent does not work hard (10 hours), there is a 15% chance that the principal will win the suit. Without a lawyer, the principal is sure to lose the suit. The principal can monitor the agent, and both parties are risk neutral. The agent's utility function is m-50e, where m is money in dollars and e is effort in hours. The agent's fee for this case is $100 per hour, and the outside opportunity is worth $500. Write down the game in extensive form and solve it.A risk-eutral plaintiff in a lawsuit must decide whether to settle a claim or go to trial. The defendants offer $70,000 to settle now. If the plaintiff does not settle, the plaintiff believes that the probability of winning at trial is 40%. If the plaintiff wins, the amount awarded to the plaintiff is X. Will the plaintiff settle if X is $87,500? What if X= $280,000? What is the critical value of X that would make the plaintiff indifferent between settling and going to trial? If 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 $87,500, then the plaintiff would settle If the amount to be awarded at trial with a win (X) were $280,000, 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 two decimal places.)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)
- Suppose the equilibrium price for good quality used cars is $20,000. And the equilibrium price for poor quality used cars is $10,000. Assume a potential used car buyer has imperfect information as to the condition of any given used car. Assume this potential buyer believes the probability a given used car is good quality is .60 and the probability a given used car is low quality is .40. Assume the seller has perfect information on all cars in inventory. How does the informational imbalance result in market failure? a. Only good quality cars are sold, hence the market under-provides used cars. b. Both poor and good quality cars are sold, hence the market over-provides used cars. c. Only poor quality cars are sold, hence the market under-provides used cars. d. Both poor and good quality cars are sold, hence the market efficiently provides used cars.Suppose the equilibrium price for good quality used cars is $20,000. And the equilibrium price for poor quality used cars is $10,000. Assume a potential used car buyer has imperfect information as to the condition of any given used car. Assume this potential buyer believes the probability a given used car is good quality is .60 and the probability a given used car is low quality is .40. Assume the seller has perfect information on all cars in inventory. How does the informational imbalance result in adverse selection? a. The expectedprice offered by the buyer encourages the seller to sell a poor quality car. Hence only poor quality cars are sold, which harms sellers. b. The expected price offered by the buyer encourages the seller to sell a good quality car. Hence only good quality cars are sold, which harms buyers. c. The expected price offered by the buyer encourages the seller to sell a good quality car. Hence only good quality cars are sold, which harms sellers. d. The…Lucy, the manager of the medical test firm Dubrow Labs, worries about the firm being sued for botched results from blood tests. If it isn't sued, the firm expects to earn profit of $120, but if it is successfully sued, its profit will be only $20. Lucy believes that the probability of a successful suit is 20%. If fair insurance is available and Lucy is risk averse, how much insurance will she buy? Lucy will buy insurance that costs her $ when not successfully sued. (Enter your response as a whole number.)