Question 1

You took a job as a salesperson in an insurance company with the knowledge that you have 0.5 chance of making $2,000 a month or $3,000 a month. How much will you make each month?

Accepted Answer

The probability of making $2,000 or $3,000 is 0.5 each, meaning you will make either $2,000 or $3,000 each month, not a definite amount.

Question 2

Joe is contemplating a job where, with probability 0.6, he will make $100,000 and with probability 0.4 he will make $30,000. What is Joe's expected income from taking the job?

Accepted Answer

The expected income is calculated by multiplying each outcome by its probability and summing the results: (0.6 * $100,000) + (0.4 * $30,000) = $60,000 + $12,000 = $72,000.

Question 3

Nick has two job offers, one as a financial planner and one as an economist for a regional bank. The income that Nick would expect to earn as a financial planner depends how effective he is in getting clients. He estimates that he would receive either $80,000 and a utility of 75, with a probability of .50, or he would earn $30,000 and a utility of 35, with a probability of .50. The economist job would pay $45,000 per year and has a utility of 55. To maximize his expected utility, which job should Nick take?

Accepted Answer

The answer of Nick has two job offers, one as...

Question 4

-James has a utility of wealth schedule in the above table. He is offered a job selling video games at Games Galore. James' compensation depends on how much he sells. In a poor sales period, a salesperson makes $100 per month. In a good sales period, a salesperson makes $600 per month. James is told by the manager that, in any given month, there is a 25 percent chance of a poor sales period and a 75 percent chance of a good sales period. What is James' expected income from taking this job?

Accepted Answer

James' expected income is calculated by multiplying each outcome by its probability and summing the results: (0.25 * $100) + (0.75 * $600) = $25 + $450 = $475.

Question 5

Dana wants to try working as an independent contractor this summer. She has a 50 percent chance that she will make $10,000 and 50 percent chance that she will make nothing. What's Dana's expected income from taking this job?

Accepted Answer

The expected income is calculated by multiplying each outcome by its probability and summing the results: (0.5 * $10,000) + (0.5 * $0) = $5,000.

Question 6

-Nancy's utility of wealth curve is given in the above figure. Option A gives Nancy $100 for sure. Option B gives Nancy $50 half the time and $150 half the time. Nancy's expected utility of option A

Accepted Answer

Nancy's utility of wealth curve is concave, indicating risk aversion. The certain $100 (Option A) provides higher utility than the expected utility of the risky Option B, which averages to $100 but with less utility due to risk aversion.

Question 7

-Dana's utility of wealth is 65 units at $3,000, 80 units at $5,000, and 95 units at $9,000. Starting from zero wealth, he must choose between options A and B. Option A gives him $5,000 for sure. Option B gives him $3,000 with probability 0.5 or $9,000 with probability 0.5. Dana will

Accepted Answer

Dana's expected utility from option A is 80 units (5,000 * 80/5,000). His expected utility from option B is also 80 units (0.5 * 65 + 0.5 * 95). Therefore, Dana will be indifferent between option A and option B because they have the same expected utility.

Question 8

-Gunnar can work as a campus security officer at a guaranteed salary of $20,000 per year or as a real estate agent. If Gunnar works as a real estate agent, there is a 50 percent chance that he will earn $10,000 per year and a 50 percent chance that he will earn $30,000 per year. Based on the table above, Gunnar's expected utility if he works as a real estate agent is

Accepted Answer

The expected utility is calculated by taking the probability-weighted average of the utilities of each outcome. If the utility of earning $10,000 is 70 and the utility of earning $30,000 is 100, then the expected utility is (0.5 * 70) + (0.5 * 100) = 35 + 50 = 85.

Question 9

-Andrew's utility of wealth schedule is given in the above table. Andrew is offered a job as a cook which pays $10,000. He is also offered a job as a server which will pay $5,000 if tips are poor and $15,000 if tips are good. There is a 50 percent chance that tips will be poor and a 50 percent chance that tips will be good. The expected income from the job as a cook is ________ and from the job as a server is ________.

Accepted Answer

The expected income from the job as a cook is $10,000. For the server job, the expected income is calculated as (0.5 * $5,000) + (0.5 * $15,000) = $10,000.

Question 10

Christy is a telemarketer. She estimates that this summer, she has a 0.2 probability of earning $10,000, a 0.5 probability of earning $5,000, and a 0.3 probability of earning only $1,000. What is Christy's expected income?

Accepted Answer

The answer of Christy is a telemarketer. She estimates that...

Question 11

Nick has two job offers, one as a financial planner and one as an economist for a regional bank. The income that Nick would expect to earn as a financial planner depends how effective he is in getting clients. He estimates that he would receive either $80,000 and a utility of 75, with a probability of .50, or he would earn $30,000 and a utility of 35, with a probability of .50. The economist job would pay $45,000 per year and has a utility of 55. The expected income as a financial planner is ________ and as an economist is ________.

Accepted Answer

The answer of Nick has two job offers, one as...

Question 12

-Andrew's utility of wealth schedule is given in the above table. The table indicates that his marginal utility of wealth ________ as his wealth increases.

Accepted Answer

As wealth increases, the additional utility (marginal utility) gained from each additional unit of wealth decreases, indicating diminishing marginal utility.

Question 13

Pablo must choose among options A, B, and C. Option A gives him $10,000 for sure. Option B gives him $4,000 with probability 0.5 or $16,000 with probability 0.5. Option C gives him $8,000 with probability 0.5 or $12,000 with probability 0.5. If he receives diminishing marginal utility from wealth, Pablo will

Accepted Answer

With diminishing marginal utility, Pablo prefers a certain outcome over a risky one with the same expected value. Option A provides a certain $10,000, which is likely more valuable to him than the expected values of options B and C due to diminishing marginal utility.

Question 14

Adriana wants to try working as an independent contractor this summer. She has a 50 percent chance that she will make $9,000 and 50 percent chance that she will make nothing. What's Adriana's expected income?

Accepted Answer

The expected income is calculated by multiplying each outcome by its probability and summing the results: (0.5 * $9,000) + (0.5 * $0) = $4,500.

Question 15

-Nancy's utility of wealth curve is given in the above figure. She is faced with a risky proposition which yields an income of $50 one-third of the time, $100 one-third of the time, and $150 one-third of the time. Her expected utility is

Accepted Answer

The answer of 
-Nancy's utility of wealth curve is given...

Question 16

Hostess Brands is selling off its assets after liquidation. A potential buyer for the Twinkies brand has found that the total revenue will be $3 billion a year if the brand is managed well and $1 billion a year if the brand is managed poorly. There is .6 (or 60 percent) chance of managing the brand well and a .4 (or 40 percent) chance of managing the brand poorly. What is the expected total revenue?

Accepted Answer

The answer of Hostess Brands is selling off its assets...

Question 17

-Gunnar can work as a campus security officer at a guaranteed salary of $20,000 per year or as a real estate agent. If Gunnar works as a real estate agent, there is a 50 percent chance that he will earn $10,000 per year and a 50 percent chance that he will earn $30,000 per year. Based on the above table, to maximize his expected utility, Gunnar will

Accepted Answer

The expected utility of working as a campus security officer is $20,000. The expected utility of working as a real estate agent is 0.5 * $10,000 + 0.5 * $30,000 = $20,000. Therefore, Gunnar will choose to work as a campus security officer.

Question 18

Jessica must choose option A or option B. Option A gives her $10,000 for sure. Option B gives her $5,000 if a fair coin toss shows heads and $15,000 if it shows tails. If Jessica is risk averse her utility of wealth curve becomes

Accepted Answer

A risk-averse individual prefers certainty over a gamble with the same expected value. Option A provides a certain $10,000, while Option B has an expected value of $10,000 but involves risk. A risk-averse person will choose the certain outcome, Option A. Additionally, a risk-averse utility curve becomes flatter as wealth increases, indicating diminishing marginal utility of wealth.

Question 19

-Andrew's utility of wealth schedule is depicted in the above table. Andrew is offered a job as a cook which pays $10,000. He is also offered a job as a server which will pay $5,000 if tips are poor and $15,000 if tips are good. There is a 50 percent chance that tips will be poor and a 50 percent chance that tips will be good. Given the nature of Andrew's job offers and his utility of wealth schedule, Andrew's expected utility from working as a cook is ________ and from working as a server is ________.

Accepted Answer

Andrew's expected utility from working as a cook is 170 units (utility of $10,000). For the server job, the expected utility is 0.5 * utility of $5,000 + 0.5 * utility of $15,000 = 0.5 * 130 + 0.5 * 190 = 160 units.

Question 20

-James has a utility of wealth schedule in the above table. He is offered a job selling video games at Games Galore. James' compensation depends on how much he sells. In a poor sales period, a salesperson makes $100 per month. In a good sales period, a salesperson makes $600 per month. James is told by the manager that, in any given month, there is a 25 percent chance of a poor sales period and a 75 percent chance of a good sales period. What is James' expected utility from taking this job?

Accepted Answer

James' expected utility is calculated by multiplying the utility of each outcome by its probability and summing these products. If we assume the utility of $100 is U(100) and the utility of $600 is U(600), then the expected utility is 0.25 * U(100) + 0.75 * U(600). The exact values of U(100) and U(600) are needed to compute the expected utility, but based on the given choices, the expected utility aligns with choice C, 175.

Quiz 20: Uncertainty and Information