You need to hire some new employees to staff your startup venture. You know that potential employees are distributed throughout the population as follows, but you can't distinguish among them: Employee Value Probability $65,000 0.25 $82,000 0.25 $99,000 0.25 $116,000 0.25   The expected value of hiring one employee is .   Suppose you set the salary of the position equal to the expected value of an employee. Assume that employees will not work for a salary below their employee value. The expected value of an employee who would apply for the position, at this salary, is .   Given this adverse selection, your most reasonable salary offer (that ensures you do not lose money) is

Setup from Question 1) An expected utility maximiser owns a car worth £60 000 and has a bank account with £20 000. The money in the bank is safe, but there is a 50% probability that the car will be stolen. The utility of wealth for the agent is u(y) = In(y) and they have no other assets. Question 2)

In the Hawaiian Beach Boy surf board vendor scenario, what if the fine was increased to $190 but the probability of a fine decreased to one in 20 days, 5%?  What would be the expected value – Exp(RS) --  of continuing to rent surfboards?  Assume the other numbers stay the same.  He makes $300/day and to rent boards from friends costs him $100 a day.  So, he makes $200 a day.  Write out the expected value formula, plug in the numbers, and show the math.  Hint: the Exp(RS) should be higher than the previously calculated $160.

A wheel of fortune in a gambling casino has 54 different slots in which the wheel pointer can stop. Four of the 54 slots contain the number 9. For a 1 dollar bet on hitting a 9, if he or she succeeds, the gambler wins 10 dollars plus the return of the 1 dollar bet. What is the expected value of this gambling game? What is the meaning of the expected value result?

Suppose that every driver faces a 2% probability of an automobile accident every year. An accident will, on average, cost each driver $14,000. Suppose there are two types of individuals: those with $112,000.00 in the bank and those with $3,500.00 in the bank. Assume that individuals with $3,500.00 in the bank declare bankruptcy if they get in an accident. In bankruptcy, creditors receive only what individuals have in the bank. Assume that both types of individuals are only slightly risk averse. In this scenario, the actuarially fair price of full insurance, in which all damages are paid by the insurance company, is .   Assume that the price of insurance is set at the actuarially fair price. At this price, drivers with $112,000.00 in the bank likely    buy insurance, and those with $3,500.00 in the bank likely    buy insurance. (Hint: For each type of driver, compare the price of insurance to the expected cost without insurance.)   Suppose a state law has been passed…

You need to hire some new employees to staff your start-up venture. You know that potential employees are distributed throughout the population as follows, but you can’t distinguish among them: Employee Value       Probability $50,000           0.25 $60,000           0.25 $70,000           0.25 $80,000           0.25 What is the expected value of five employees you hire?

Suppose Alex’s utility function is u ($x) = √x. Assume her initial wealth is 0. Is it possible that Alex’s expected utility from the prospect equals $5, why? What is the possible range of Alex’s expected utility?

Suppose that every driver faces a 2% probability of an automobile accident every year. An accident will, on average, cost each driver $7,000. Suppose there are two types of individuals: those with $42,000.00 in the bank and those with $1,750.00 in the bank. Assume that individuals with $1,750.00 in the bank declare bankruptcy if they get in an accident. In bankruptcy, creditors receive only what individuals have in the bank. Assume that both types of individuals are only slightly risk averse. In this scenario, the actuarially fair price of full insurance, in which all damages are paid by the insurance company, is $ Assume that the price of insurance is set at the actuarially fair price. At this price, drivers with $42,000.00 in the bank likely v buy insurance, and those with $1,750.00 in the bank likely buy insurance. (Hint: For each type of driver, compare the price of insurance to the expected cost without insurance.) Suppose a state law has been passed forcing all individuals to…

David is an expected-utility maximizer that likes to drive fast (and reckless at times), so his probability of an accident is 2/3. David's preferences over wealth are u(w) = vw. Suppose that David's initial wealth is $100. If David has an accident, he incurs a $51 loss. How much is the risk premium David willing to pay to be as well off in case of accident or not?

An individual has a utility function U(W) = VW, where W is the level of wealth. They have been offered a gamble with a payout of £170 with a probability of 0.74 and a payout of £49.7 with a probability of 1-0.74. The Certainty Equivalent of this gamble is: Answer: