Quantitative Problems PDF

Q U A N T I TAT I V E P R O B L E M S 1. Sam is in the market for a used motorbike. At a used- If Melissa is lazy, she will surf the Internet all day, and bike shop, Sam roughly knows that the price of a she views this as a zero cost opportunity. However, used-motorbike is b...

Q U A N T I TAT I V E P R O B L E M S 1. Sam is in the market for a used motorbike. At a used- If Melissa is lazy, she will surf the Internet all day, and bike shop, Sam roughly knows that the price of a she views this as a zero cost opportunity. However, used-motorbike is between $40,000 and $48,000. If Melissa would view working hard as a “personal cost” Sam believes that the dealer knows as much about valued at $2,000. What fixed-percentage of the profits the bikes as him, how much do you think Sam is will- should you offer Melissa? Assume Melissa only cares ing to pay? Explain. Assume that he only cares about about her expected payment less any “personal cost.” the expected value of the bike he buys and that the 4. You own a house worth $800,000, situated on the bike values are symmetrically distributed. banks of a river. If the river floods moderately, the 2. Sam now decides to go to a different town to search for house will be completely destroyed. This happens a used motorbike and believes that the dealer knows about once every 80 years. If you build a seawall, more about the used-motorbikes than him. How much the river would have to flood heavily to destroy your do you think that Sam is willing to pay? Discuss. How house, and this only happens about once every 400 can this be resolved in a competitive market? years. What would be the annual premium for an 3. You wish to hire Melissa to manage your Kansas insurance policy that offers full insurance? For a operations. The profits from the operations depend policy that only pays 80% of the home value? What partially on how hard Melissa works, as follows: are your expected costs with and without a seawall? Do the different policies provide an incentive to be safer (that is, to build the seawall)? Probabilities Profit = Profit = $20,000 $100,000 Lazy Worker 65% 35% Hard Worker 30% 70%