EBK INTERMEDIATE MICROECONOMICS AND ITS
12th Edition
ISBN: 9781305176386
Author: Snyder
Publisher: YUZU
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Chapter 4.3, Problem 1MQ
To determine
The bet of $100 on coin flips is an example of diversification is to be determined.
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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.
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.<
+
You are considering a $500,000 investment in the fast-food industry and have narrowed your choice to either a
McDonald's or a Penn Station East Coast Subs franchise. McDonald's indicates that, based on the location where you
are proposing to open a new restaurant, there is a 25 percent probability that aggregate 10-year profits (net of the
initial investment) will be $16 million, a 50 percent probability that profits will be $8 million, and a 25 percent
probability that profits will be -$1.6 million. The aggregate 10-year profit projections (net of the initial investment) for
a Penn Station East Coast Subs franchise is $48 million with a 2.5 percent probability, $8 million with a 95 percent
probability, and -$48 million with a 2.5 percent probability. Considering both the risk and expected profitability of
these two investment opportunities, which is the better investment? Explain carefully.
Chapter 4 Solutions
EBK INTERMEDIATE MICROECONOMICS AND ITS
Ch. 4.1 - Prob. 1MQCh. 4.1 - Prob. 2MQCh. 4.1 - Prob. 3MQCh. 4.2 - Prob. 1TTACh. 4.2 - Prob. 2TTACh. 4.2 - Prob. 1MQCh. 4.3 - Prob. 1TTACh. 4.3 - Prob. 2TTACh. 4.3 - Prob. 1MQCh. 4.3 - Prob. 2MQ
Ch. 4.3 - Prob. 3MQCh. 4.3 - Prob. 1.1TTACh. 4.3 - Prob. 1.2TTACh. 4.3 - Prob. 2.1TTACh. 4.3 - Prob. 2.2TTACh. 4.3 - Prob. 1.1MQCh. 4.3 - Prob. 2.1MQCh. 4.3 - Prob. 3.1MQCh. 4.4 - Prob. 1TTACh. 4.4 - Prob. 2TTACh. 4 - Prob. 1RQCh. 4 - Prob. 2RQCh. 4 - Prob. 3RQCh. 4 - Prob. 4RQCh. 4 - Prob. 5RQCh. 4 - Prob. 6RQCh. 4 - Prob. 7RQCh. 4 - Prob. 8RQCh. 4 - Prob. 9RQCh. 4 - Prob. 10RQCh. 4 - Prob. 4.1PCh. 4 - Prob. 4.2PCh. 4 - Prob. 4.3PCh. 4 - Prob. 4.4PCh. 4 - Prob. 4.5PCh. 4 - Prob. 4.6PCh. 4 - Prob. 4.7PCh. 4 - Prob. 4.8PCh. 4 - Prob. 4.9PCh. 4 - Prob. 4.10P
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