Exam 12: The Economics of Information

An apple farmer must decide how many apples to harvest for the world apple market.He knows that there is a one-third probability that the world price will be $1,a one-third probability that it will be $1.50,and a one-third probability that it will be $2.His cost function is C(Q)= .01Q².If the farmer is risk neutral:

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. Praject Bamn (50\%) Recession (50\%) A \ 20 -\ 10 B -\ 10 \ 20 C \ 30 -\ 30 D \ 50 \ 50 The variance in the returns of project D is:

Which of the following is NOT an example of a managerial decision with risk-averse consumers?

Which of the following is a means of eliminating the undesirable effects of adverse selection?

A manager is attempting to assess the probability of a recession ending in the next six months and its impact on expected profitability.The manager believes there is a 75 percent chance the recession will end in six months and profits will return to $400 million.However,there is a 25 percent chance the recession will not end in six months,resulting in a $5 million loss.The expected profits over the next six months are:

OJ's Orange Juice produces orange juice to sell in a competitive market.Given uncertainty in weather patterns,OJ has to determine how much juice to produce before knowing the competitive price.It is estimated that there is a 10 percent chance the competitive price will be $5 and a 90 percent chance the price will be $2.If the marginal cost of producing orange juice is MC(Q)= 2Q,then to maximize expected profits,OJ should produce:

A manager is attempting to assess the probability of a recession ending in the next six months and its impact on expected profitability.The manager believes there is a 33 percent chance the recession will end in six months and profits will return to $100 million.However,there is a 67 percent chance the recession will not end in six months,resulting in a $7 million loss.The standard deviation of profits over the next six months is:

Consider 45 risk-neutral bidders who are participating in a second-price,sealed-bid auction.It is commonly known that bidders have independent private values.Based on this information,we know the optimal bidding strategy for each bidder is to:

A peach farmer must decide how many peaches to harvest for the world peach fair.He knows that there is a 25 percent chance that the world price will be $3,a 50 percent chance that it will be $3.50,and a 25 percent chance that it will be $4.His cost function is C(Q)= 0.05Q².The expected profit-maximizing quantity is:

A manager is attempting to assess the probability of a recession ending in the next six months,and its impact on expected profitability.The manager believes there is a 75 percent chance the recession will end in six months and profits will return to $400 million.However,there is a 25 percent chance the recession will not end in six months,resulting in a $5 million loss.The standard deviation of profits over the next six months is:

A risk-averse manager is considering a project that will cost $100.There is a 10 percent chance the project will generate revenues of $100,an 80 percent chance it will yield revenues of $50,and a 10 percent chance it will yield revenues of $500.Should the manager adopt the project?

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. Praject Bamn (50\%) Recession (50\%) A \ 20 -\ 10 B -\ 10 \ 20 C \ 30 -\ 30 D \ 50 \ 50 Which project has the lowest variance?

Suppose that 20 percent of the firms selling good X charge the low price.If the remaining 80 percent of firms charge $80 per unit and the expected benefit of an additional search is $5,then the lowest price in the market for good X is:

The winner's curse occurs:

You are a hotel manager and you are considering four projects that yield different payoffs,depending upon whether there is an economic boom or a recession.The potential payoffs and corresponding payoffs are summarized in the following table. Praject Bamn (50\%) Recession (50\%) A \ 20 -\ 10 B -\ 10 \ 20 C \ 30 -\ 30 D \ 50 \ 50 The expected value of project D is:

As a personnel director of a major consulting firm,you have been asked to decide whether to hire new employees.At present the economy is in a recession,and you have more people than you need to operate the business.Next year there is a 65 percent chance you will need more people and a 35 percent chance you will need fewer people.What additional information would you need when making this decision?

Consider a market for product X where 75 percent of the stores charge $500 and 25 percent charge $450.Compute the expected benefit from an additional search when the first search results in a price of $500.

An apple farmer must decide how many apples to harvest for the world apple market.He knows that there is a one-third probability that the world price will be $1,a one-third probability that it will be $1.50,and a one-third probability that it will be $2.His cost function is C(Q)= 0.01Q².What is the expected price in the world apple market?

John is a seller in an independent private-values auction environment where bidders are risk neutral.Which auction yields John the greatest expected revenue?

You are the manager of a firm that has just created a new and improved version of a product you know to be superior to every other product on the market.To signal your quality,you have instructed your marketing department to change the label of your firm's product to include the phrase,"New and Improved." Based on this information,do you think it is prudent to contact your production department and instruct them to significantly expand capacity?