EBK MICROECONOMICS
9th Edition
ISBN: 8220103630955
Author: Rubinfeld
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 5, Problem 5E
(a)
To determine
The expected return of the project and the variance.
(b)
To determine
The
(c)
To determine
The change in policy premium.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
You start an insurance company as your first entrepreneurial venture after graduation. Your main product line is malpractice insurance for dentists. After exhaustive research, you learn that settling malpractice claims against careful dentists costs $2,000 and settling malpractice claims against reckless dentists costs $7,500. Individual dentists know whether they are reckless or careful, and your research shows that approximately 20% of dentists are reckless. How much do should you charge for malpractice insurance to break even?
You bought a ticket for a concert of Taylor Swift in Manchester for £400. If you want, you can return the ticket for a full refund up to the start of the concert. You were willing to pay up to £600 for that ticket. The train ticket from your home to Manchester and return costs £150. There are no other costs of going to the concert. You realise now that the concert is sold out. After checking various websites, you receive a firm offer for your concert ticket of £2100. If you do not go to the concert, your next best alternative for that day is watching a pay-per-view video of an Amy McDonalds concert on Netflix for £50 at home. Your willingness to pay for the pay-per-view video is £300 (Your willingness to pay for the concert ticket does not change over time.)
Which decision is the optimal decision in economic terms? What is the opportunity cost of going to the concert in Manchester? What is the opportunity cost of staying home? Calculate the net cost (or net benefit) if you decide to…
You are a CEO of a very large health technology firm. You just completed a lucrative $5 bilion deal with a frm in Singapore. Your assistant had to purchase an airline ticket for you to fly to close the deal with a large ceremony in Singapore. There were no available seats on any of the airlines. Your assistant was able to find a business class ticket for $4OK. You told her to purchase the ticket right away since the deal was so important. Giving up the ticket would mean to give up the lucrative deal.
In the aircraft, you started having some conversation with a gentleman from Texas sitting next to you in the business class. You learned that he paid only $3K for his ticket and he was traveling for a wedding of his buddy. He purchased his ticket almost a year ago since the wedding was already planned. You then remembered about your college economics professor. In your mind silently you thanked your professor for teaching the economic concepts to make sense of the many situations…
Knowledge Booster
Similar questions
- As CEO of J&J, a huge pharmaceutical company, you and your management team face the decision of whether to undertake a $150 million R&D effort to create a new mega-medicine. Your research scientists estimate that there is a 35 percent chance of successfully creating the drug. Success means securing a worldwide patent worth $500 million (implying a net profit of $350 million). However, firm BigMed (your main rival) has just announced that it is spending $100 million to pursue the development of the same medicine (by a scientific method completely independent of yours). You judge that BigMed’s chance of success is 40 percent. Furthermore, if both firms are successful, they will split equally the available worldwide profits ($250 million each) based on separate patents. Assume that firms J&J and BigMed are risk neutral. Use decision trees and the expected profits criterion to justify your answer for the following problems. Should firm J&J undertake the R&D effort to…arrow_forwardAs CEO of firm A, you and your management team face the decision of whether to undertake a $200 million R&D effort to create a new mega-medicine. Your research scientists estimate that there is a 40 percent chance of successfully creating the drug. Success means securing a worldwide patent worth $550 million (implying a net profit of $350 million). However, firm B (your main rival) has just announced that it is spending $150 million to pursue development of the same medicine (by a scientific method completely independent of yours). You judge that B’s chance of success is 30 percent. Furthermore, if both firms are successful, they will split equally the available worldwide profits ($275 million each) based on separate patents. Assume that firms A and B are risk neutral. Use decision trees to justify your answer for the following problems. a) Suppose that firms A and B form a joint venture and are going to pursue A’s R&D program first and in case of its failure they will…arrow_forwardSuppose research at Panasonic reveals that prospective buyers are anxious about buying high definition television sets. What strategies might you recommend to the company to reduce consumer anxietyarrow_forward
- Your company has a customer who is shutting down a production line, and it is your responsibility to dispose of the extrusion machine. The company could keep it in inventory for a possible future product and estimates that the reservation value is $350,000. Your dealings on the secondhandmarket lead you to believe that if you commit to a price of $400,000, there is a 0.4 chance you will be able to sell the machine. If you commit to a price of $450,000, there is a 0.25 chance you will be able to sell the machine. If you commit to a price of $500,000, there is a 0.1 chance you will be able to sell the machine. These probabilities are summarized in the following table. For each posted price, enter the expected value of attempting to sell the machine at that price. (Hint: Be sure to take into account the value of the machine to your company in the event that you are not be able to sell the machine.)arrow_forwardAfter graduating, you start work as a management consultant. You are paid $210 per hour. One morning before work, you decide to buy a new car. You know the exact model you want, and you know that in your area the price ranges from $39,000 to $41,000, with the average price you can expect to pay being $40,000. You can choose among hundreds of dealers, but you don't know which dealer will give you the best price. Time is literally money, since every hour you spend searching is an hour you don't get paid. Each visit to a dealer takes an hour. Your expected marginal benefit of another search is the difference between the current dealer's offer and the average price. The first dealer you go to asks $40,500 for the car. Should you accept the price or keep searching? (Keep in mind that each visit to a dealer takes an hour.) Keep searching. Accept the price. Suppose you kept searching, and the next dealer you go to asks $40,150. Do you think you should accept this price or keep searching? O…arrow_forwardJohn owns and runs a food truck, which he expects to increase his wealth to $40,000 this year. John knows that every year, there is a 20% chance that his truck will be firebombed by one of his ruthless food truck competitors. If this happens, he will face a bill of $10,000 in repairs and lost income. John can choose to get insurance to cover all repair costs and lost wealth. Use this information and the information in the table and graph to answer the questions. Total utility Wealth Total utility (utils) 730 1000 $32,000 900 $34,000 755 800 700 $36,000 785 600 792 500 $38,000 400 300 200 100 0 $5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 Wealth What is John's expected wealth? expected wealth: $ What is the price for John's insurance? price of insurance: $ What is John's expected utility without insurance? expected utility: 730 If John chooses to pay the insurance policy price, what would be his total utility? total utility: 1030 42000 10000 utils utilsarrow_forward
- Suppose that in year 1, Acme Corporation can make a real (inflation-adjusted) return on an investment of 3 percent. Assume the nominal interest rate is 8 percent and the inflation rate is 4 percent. Instructions: Enter your answer as a whole number. a. Using this information, we can conclude that the investment would not be profitable b. Suppose that in year 2, the real interest rate changes to 7 percent while inflation remains constant at 4 percent. In year 2, the nominal interest rate must be percent.arrow_forwardQuestion 5 You negotiate with a retailer over a contract according to which the retailer would buy a large fraction of your current production for next year. The retailer is perfectly informed about consumer demand, but you do not know whether demand is high or low. You only know that the probability for high demand is 80%. If demand is high, the retailer's profit is £5 million minus what he pays to you according to your contract. If demand is low, the retailer's profit is £3 million minus what he pays to you. Your costs of producing the output specified in the contract are £1 million. You can make sequential offers for the retailer's total payment for you to deliver a fixed quantity of your production. As you know that your competitor is also seeking a similar contract with this retailer, and the retailer can only supply one firm due to limited shelf space, you know that you can only make at most two offers. If your first offer is rejected, the retailer will strike the deal with your…arrow_forwardYour firm has a new strategy that will make its established product obsolete. However, it will take a year before you are ready to implement the new strategy. If you announce your plan in advance, profits will disappear because many customers will delay purchase until the new product is released. If you don't announce the new plan, customers will continue to buy the established product, but others may end up not doing business with you in the long run. What would you decide to do?arrow_forward
- Sean is a community college student and has been saving his tips from his job waiting tables at a restaurant for months to see Hamilton. He is willing to pay $705 for a ticket. Anca has seen Hamilton five times already, but wants to see it again before heading to Europe for a month. She is willing to pay $1,250 for a ticket. There is one ticket left, and the seller is charging $700. Does Sean or Anca buying the ticket lead to a more economically efficient outcome?arrow_forwardJames has two young children (Finn and lain) who are visiting the doctor for their annual well-child check-ups. The doctor's office charges $105 for well-child appointments. Health insurance pays 100% of the costs associated with well-child visits and does not require a copayment. James' health plan monthly premium is $1,400 and has a $1,000 deductible. How much will James be charged when the appointment is done?arrow_forwardYou are trying to decide between rescuing a puppy or an older dog. You decide to try to assign some numbers to your preferences so you can compare options. You estimate that your utility for a dog that will chew your furniture is 0.1 and your utility for a dog that can go on hikes with you is 0.8. You expect that a puppy will have an 70% chance of chewing your belongings and a 90% chance of going on hikes. What is your expected utility for getting the puppy?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSONEngineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
- Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage LearningManagerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage LearningManagerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education