A risk-neutral plaintiff in a lawsuit must decide whether to settle a claim or go to trial. The defendants offer $100,000 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 $125,000? What if X= $400,000? 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 $125,000, then the plaintiff would settle If the amount to be awarded at trial with a win (X) were $400,000, then the plaintiff would
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- 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)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.)In the final round of a TV game show, contestantshave a chance to increase their current winnings of$1 million to $2 million. If they are wrong, theirprize is decreased to $500,000. A contestant thinkshis guess will be right 50% of the time. Should heplay? What is the lowest probability of a correctguess that would make playing profitable?
- 23. Captain Kidd has a map that has a 20% probability of leading him to a treasure worth 400,000 guineas. Independent of the fact of having a map, Capitan Kidd already has his own income equal to 90,000 guineas. Another pirate wants to buy the map from the Capitan Kidd (after selling the map Capitan Kidd has no chance to find a treasure). What is the minimum price for a map which the Captain Kidd will accept if Capitan Kidd has von Neuman- Morgenstern utility function is U(w) = w0.5, where w is his income level? a) 54,400 b) 32,500 c) 45,000 d) 90,000 e) There is no correct answerMany decision problems have the following simplestructure. A decision maker has two possible decisions, 1 and 2. If decision 1 is made, a sure cost of c isincurred. If decision 2 is made, there are two possibleoutcomes, with costs c1 and c2 and probabilities p and1 2 p. We assume that c1 , c , c2. The idea is thatdecision 1, the riskless decision, has a moderate cost,whereas decision 2, the risky decision, has a low costc1 or a high cost c2.a. Calculate the expected cost from the riskydecision.b. List as many scenarios as you can think of thathave this structure. (Here’s an example to get youstarted. Think of insurance, where you pay a surepremium to avoid a large possible loss.) For eachof these scenarios, indicate whether you wouldbase your decision on EMV or on expected utilityThe manager of XYZ Company is introducing a new product that will yield N$1000 in profits if the economy does not go into a recession. However, if a recession occurs, demand for normal good will fall so sharply that the company will lose N$4000. If economists project that there is a 10 percent chance the economy will go into a recession, what are the expected profits to XYZ Company of introducing the new product? How risky is the introduction of the new product?
- 2- Who is risk aversion?Suppose Grace and Lisa are to go to dinner. Lisa is visiting Grace from outof town, and they are to meet at a local restaurant. When Lisa lived in town,they had two favorite restaurants: Bel Loc Diner and the Corner Stable. Ofcourse, Lisa’s information is out of date, but Grace knows which is betterthese days. Assume that the probability that the Bel Loc Diner is better isp > 1/2 and the probability that the Corner Stable is better is 1 - p. Naturedetermines which restaurant Grace thinks is better. Grace then sends amessage to Lisa, either “Let’s go to the Bel Loc Diner,” “Let’s go to theCorner Stable,” or “I don’t know [which is better].” Lisa receives the message, and then Grace and Lisa simultaneously decide which restaurant to go to. Payoffs are such that Grace and Lisa want to go to the same restaurant, but they prefer it to be the one that Grace thinks is better. More specifically, if, in fact, the Bel Loc Diner is better, then the payoffs from theiractions are as shown in the…Economics A risk neutral worker has a reservation wage of 500 and a cost of high effort of 187. Depending on the effort put by the worker and some random luck factor, the employer will earn 2500 (if the worker puts high effort and he gets lucky), or 1500 (if the worker puts high effort and he gets unlucky OR if the worker puts low effort and he gets lucky), or 500 (if the worker puts low effort and he gets unlucky). Assume the worker gets lucky with probability 0.4. The employer wants to incentivize the worker to put high effort and decides to pay the worker an incentive contract comprised of a fixed wage of $500 plus a bonus paid only if the profit of 2500 is realized. Calculate the optimal such bonus that the employer should pay, if it wants to incentivize the worker and maximize its profits at the same time. Round your answer to 2 decimals, if needed.
- 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?An individual has 40,000 in income per year. The person will get sick with probability 0.1. If he does get sick, the medical bills will total 30,000. The following tables shows the utility derived from certain amounts of income: Income Utility40,000 20037,000 19535,000 19030,000 17020,000 14010,000 100Considering the probability of illness, what is the expected utility of income without insurance? Show your work.2. Christiaan can go hiking, or he can stay at home. Hiking would be fun if nothing bad happens, but there is a risk if he goes hiking that he will meet a bear (not fun) or get bitten by a snake (very not fun). Christiaan decides that if there is a 5% chance of meeting a bear and a 1% chance of getting bitten by a snake, he would prefer to go hiking rather than stay at home. However, if the chance of meeting a bear is 10% and the chance of a snake bite is 5%, he definitely would rather stay at home. then (a) Consider the utility function: U (stay home) = 25, U (hike no event) = 100, U (hike & snake) -1000, U (hike & bear) = -200. Does this utility function represent Christiaan's pref- erences? Explain. (b) Suppose that the utility function in (a) does represent Christiaan's preferences. Would Christiaan prefer to hike or stay home if the probability of meeting a bear is 6% and the probability of being bitten by a snake is 4%? Show your work.