Question 1

Max is considering the following offer: a 50% chance of winning $10 and a 50% chance of losing $9.The expected value of this gamble is

Accepted Answer

The expected value is calculated as (0.5 * $10) + (0.5 * -$9) = $5 - $4.50 = $0.50.

Question 2

Vinnie is looking for an apartment in Dayton,Ohio.In Dayton,75% of the two bedroom,one bath apartments are $800 a month and 25% are $600.The marginal cost of his search increases by $15 per search,i.e. ,the marginal cost of looking at the first apartment is $15,the marginal cost of looking at the second apartment is $30,the marginal cost of looking at the third apartment is $45 and so on.
The marginal cost of looking at the fourth apartments is

Accepted Answer

The marginal cost of looking at the fourth apartment is $60, as it increases by $15 for each subsequent search.

Question 3

The probability that Mo will like a particular movie is 90% and has a value of $40.Not liking the movie has a value of -$10.The expected value of going to that movie is

Accepted Answer

The expected value is calculated by multiplying each outcome by its probability and summing the results: (0.9 * $40) + (0.1 * -$10) = $36 - $1 = $35.

Question 4

Vinnie is looking for an apartment in Dayton,Ohio.In Dayton,75% of the two bedroom,one bath apartments are $800 a month and 25% are $600.The marginal cost of his search increases by $15 per search,i.e. ,the marginal cost of looking at the first apartment is $15,the marginal cost of looking at the second apartment is $30,the marginal cost of looking at the third apartment is $45 and so on.
At most,Vinnie will be willing to look at _____ apartments.

Accepted Answer

To determine the number of apartments Vinnie is willing to look at, we need to find the point where his marginal benefit from finding an apartment equals his marginal cost of looking.

Let's assume Vinnie values finding a $800 apartment at $1,000 and a $600 apartment at $500. The total benefit he can receive from finding an apartment is then:

($1000 x 0.75) + ($500 x 0.25) = $875

Now, let's calculate his marginal benefit. The benefit of finding the first $800 apartment is $1000, the benefit of finding the second $800 apartment is $0 since he only needs one, and the benefit of finding the $600 apartment is $500. Therefore, his marginal benefit from each search is:

$1000, $0, and $500 respectively.

Since his marginal benefit from the third search is $500 and his marginal cost is $45, he will stop looking after three searches, which is the point where the marginal benefit equals the marginal cost. Therefore, Vinnie is willing to look at 3 apartments at most.

Question 5

Chris has determined that the probability of earning a 95 on the next economics test is 10%,the probability of earning an 85 is 40%,and the probability of earning a 75 is 50%.
Chris's expected score on this test can be determined by solving

Accepted Answer

The formula for expected value is to multiply each possible outcome by its probability of occurring, and then add up all the results. In this case, the expected score is (0.1)(95) + (0.4)(85) + (0.5)(75) = 9.5 + 34 + 37.5 = 81.

Question 6

Mel is thinking of going on a cruise.Mel values a cruise in nice weather at $2,000 and values a cruise in bad weather at $50.According to a very reliable source,the probability of nice weather is 60% and the probability of bad weather is 40%.Trip insurance is sometimes available.If purchased,it allows travelers to delay the cruise until the weather is nice.
Suppose that the price of the cruise is $1200.If Mel is not risk averse,Mel should buy trip insurance

Accepted Answer

The expected value of the cruise without insurance is 0.6 * $2000 + 0.4 * $50 = $1220. The maximum Mel should pay for insurance is the difference between this expected value and the cruise price, which is $1220 - $1200 = $20. However, since insurance allows Mel to ensure nice weather, the value of the cruise becomes $2000, so Mel should be willing to pay up to $2000 - $1220 = $780 for the insurance.

Question 7

Vinnie is looking for an apartment in Dayton,Ohio.In Dayton,75% of the two bedroom,one bath apartments are $800 a month and 25% are $600.The marginal cost of his search increases by $15 per search,i.e. ,the marginal cost of looking at the first apartment is $15,the marginal cost of looking at the second apartment is $30,the marginal cost of looking at the third apartment is $45 and so on.
Suppose that Vinnie discovers that the distribution of high price - low price apartments is not 75% and 25% but 60% and 40%.He will now be willing to look at a maximum of __________ apartments.

Accepted Answer

If Vinnie discovers that 60% of the apartments are priced at $800 and 40% are priced at $600, then the cost of finding the $800 apartment is higher as he needs to search through more apartments on average to find one. Using the original distribution of 75% and 25%, Vinnie would need to search on average 1/(0.75) = 1.33 $800 apartments to find one. With the new distribution of 60% and 40%, Vinnie would need to search on average 1/(0.6) = 1.67 $800 apartments to find one. This means he would need to search more apartments on average, increasing his marginal cost of search to $105 after looking at 7 apartments.

At this point, the marginal cost of search is higher than the benefit of finding the more expensive apartment, so Vinnie should stop searching. The maximum number of apartments he can look at before his marginal cost equals his marginal benefit is 5. Therefore, the best choice is B) 5.

Question 8

Mel is thinking of going on a cruise.Mel values a cruise in nice weather at $2,000 and values a cruise in bad weather at $50.According to a very reliable source,the probability of nice weather is 60% and the probability of bad weather is 40%.Trip insurance is sometimes available.If purchased,it allows travelers to delay the cruise until the weather is nice.
Mels' friend Flo is risk-averse.Flo's reservation prices for cruises under the different weather conditions are the same as Mel's.Flo will

Accepted Answer

Flo is risk-averse, which means she is willing to pay more to avoid the risk of having a bad experience. Since Mel values a cruise in bad weather at only $50, she may not see the value in purchasing trip insurance. However, Flo would be willing to pay more for the insurance because she wants to avoid the risk of bad weather. Therefore, choice C is the best option.

Question 9

Chris has determined that the probability of earning a 95 on the next economics test is 10%,the probability of earning an 85 is 40%,and the probability of earning a 75 is 50%.
Chris's expected test score is _______.

Accepted Answer

To find Chris's expected test score, we multiply each possible score by its respective probability and add the products together. 
Expected score = (0.10 x 95) + (0.40 x 85) + (0.50 x 75) 
Expected score = 9.5 + 34 + 37.5 
Expected score = 81

Question 10

Lou and Toby both live in a little town and are trying to sell their cars.Both of their cars have a blue book value of $10,000.Lou has an American car like most of the people in town.Toby owns a Bulgarian car,the only one in town.Who will get closest to the blue book value for her car?

Accepted Answer

Lou is likely to get closer to the blue book value because potential buyers have more information and familiarity with American cars, making them more comfortable with the purchase.

Question 11

A risk-averse individual will

Accepted Answer

A risk-averse person will only accept better-than-fair gambles. They will refuse any fair gamble.

Question 12

Mel is thinking of going on a cruise.Mel values a cruise in nice weather at $2,000 and values a cruise in bad weather at $50.According to a very reliable source,the probability of nice weather is 60% and the probability of bad weather is 40%.Trip insurance is sometimes available.If purchased,it allows travelers to delay the cruise until the weather is nice.
If a gamble has an expected value of $10,then one can predict that

Accepted Answer

Risk-neutral persons make decisions based on expected value alone. If the expected value of a gamble is $10, a risk-neutral person would take the gamble because they are indifferent to risk and focus on the expected monetary outcome.

Question 13

Mel is thinking of going on a cruise.Mel values a cruise in nice weather at $2,000 and values a cruise in bad weather at $50.According to a very reliable source,the probability of nice weather is 60% and the probability of bad weather is 40%.Trip insurance is sometimes available.If purchased,it allows travelers to delay the cruise until the weather is nice.
A gamble that offers a 1% chance of winning $699.93 and a 99% chance of losing $7.07 would be classified as a(n)

Accepted Answer

The expected value of the cruise without trip insurance is:
(0.6 x $2,000) + (0.4 x $50) = $1,210
The expected value of the cruise with trip insurance is:
(0.6 x $2,000) + (0.4 x $0) = $1,200
Since $1,200 is less than $1,210, it is not worth purchasing trip insurance. 
As for the gamble, the expected value is:
(0.01 x $699.93) + (0.99 x -$7.07) = $6.93
Since the expected value is negative, this is an unfair gamble. Therefore, the best choice is to not take the gamble.

Question 14

A risk-neutral individual will

Accepted Answer

A risk-neutral individual is willing to take any gamble if its expected value is greater than or equal to zero. This means that they are indifferent to risk and do not consider it good or bad. Therefore, they would accept any gamble with an expected value of zero or greater.

Question 15

Mel is thinking of going on a cruise.Mel values a cruise in nice weather at $2,000 and values a cruise in bad weather at $50.According to a very reliable source,the probability of nice weather is 60% and the probability of bad weather is 40%.Trip insurance is sometimes available.If purchased,it allows travelers to delay the cruise until the weather is nice.
In the absence of trip insurance,the most Mel will be willing to pay for the cruise is _______.

Accepted Answer

The answer of Mel is thinking of going on a...

Question 16

Vinnie is looking for an apartment in Dayton,Ohio.In Dayton,75% of the two bedroom,one bath apartments are $800 a month and 25% are $600.The marginal cost of his search increases by $15 per search,i.e. ,the marginal cost of looking at the first apartment is $15,the marginal cost of looking at the second apartment is $30,the marginal cost of looking at the third apartment is $45 and so on.
The expected benefit to Vinnie of searching for an apartment is

Accepted Answer

The answer of Vinnie is looking for an apartment in...

Question 17

Pascal is risk-averse while Marion is risk-neutral.Both are confronted with the following gamble: win $5,000 with the probability of 65% or lose $9,000 with a probability of 35%.One can predict that

Accepted Answer

The answer of Pascal is risk-averse while Marion is risk-neutral.Both...

Question 18

Cal has two choices.The first offers a 50% chance of winning $20 and a 50% chance of losing $20.The second option offers a 20% chance of winning $100 and an 80% chance of losing $20.Which choice has the larger expected value?

Accepted Answer

To find the expected value of each option, we multiply the probability of winning by the amount won and the probability of losing by the amount lost, and then sum these products.

For the first option, the expected value is: 
(0.5)(20) + (0.5)(-20) = 0

For the second option, the expected value is: 
(0.2)(100) + (0.8)(-20) = 16

Therefore, the second option has a higher expected value and would be the better choice for Cal.

Question 19

A 65% chance of winning $10 and a 35% chance of losing $5 would be classified as a(n)

Accepted Answer

A 65% chance of winning $10 and a 35% chance of losing $5 means that the expected value of the gamble is (0.65*$10) - (0.35*$5) = $4.75, which is positive. This makes it a better than fair gamble, as the expected value is greater than 0.

Question 20

Consider the problem of finding an apartment for rent.If the expected value of going to see the next apartment is zero,then

Accepted Answer

Risk-averse people avoid options with uncertain outcomes when the expected value is zero, as they prefer certainty and are not willing to take on additional risk without potential gain.

Quiz 11: The Economics of Information