For small gambles, people are generally risk
are generally risk .
For a manager who is risk ___________, the __________ of profits does not affect
managerial decisions.
.For larger gambles, people
Reservation price satisfies which of the following conditions? (Where p represents
the price and c represents the cost per search.)
Suppose an individual prefers $12 with certainty over a risky prospect with the
possibility to win $18, but an expected value of $12. What type of individual is this?
Suppose that a fair die is rolled and, based on the result, you receive the following
payout:Rolling a six pays $12, a five pays $10, a four pays $8, a three pays $6, a
two pays $4, and a one pays $2.The expected value of the game equals $.
Suppose that a fair coin is tossed and if a head appears you receive $10 and if a tail
appears you receive $20. The expected value of this game is:
Comparison advertising is used to induce a risk averse individual to purchase a new
product because if the consumer expects homogeneity between the old and the
new product,
EB(R) = c
Blank 1: loving
Blank 2:
averse
neutral; variance
Blank 1: 7 or 7.00
Risk averse - Reason:
$15 Reason:
E[x] = 0.5($10) + 0.5($20) = $15
the individual will not likely switch from the existing product to the new product
Will
Risk loving
Blank 1: averse
Offer free
samples Lower
price
Blank 1: reservation
greater than the reservation price.
The strategies are exactly the same.
If an individual prefers a sure amount of $M to a risky prospect with an expected value of $M, they are
risk averse.
If E[MR] < MC, a manager should
Comparison advertising is a technique used to induce risk
try new products.
Indicate how a manager can induce a risk averse individual to consume new
products.
individuals to
The optimal search strategy is to search for a better price when the price charged
by a firm is
Compare the search strategy of a risk-neutral producer to a risk-neutral consumer.
Suppose an individual prefers a risky prospect with the possibility to win $18, but
an expected value of $12, over $12 with certainty. What type of individual is this?
When a consumer reaches a point of indifference between paying a given price and
searching for a lower price, then that consumer has reached his/her price.
A manager's attitude toward risk _______ affect the likelihood that they will pursue a
risky project.
E[MR] = MC
reduce output.
adverse selection
Blank 1: asymmetric
asymmetric information.
asymmetric information.
To reduce asymmetric information
asymmetric information and hidden actions.
Continue searching since the expected benefit exceeds the cost.
Insider trading is an example of
Moral hazard tends to result from
information.
Asymmetric information and hidden characteristics can lead to:
When one party to a transaction has better information than another, it is called
Workers tend to know much more about their own tendencies than their resumes
predict. This is an example of
In order to maximize expected profits, a manager should produce a level of output
where
Suppose 25% of workers in a market are willing to work for $55,000 and 75% of
workers are willing to work for $63,000. If the cost of the search equals $1200, what
should the manager do?
Firms spend substantial amounts of money in order to verify the credit-worthiness of
their customers. Why?
Indicate the four basic types of auctions.
The different auction types differ with respect to:
Signals in both the product market and the labor market are useful if
Suppose 25% of workers in a market are willing to work for $55,000 and 75% of
workers are willing to work for $63,000. The expected benefit of searching
(interviewing) another worker equals $.
When the true underlying value of an item is the same for all bidders, it is called
a(n) -value auction.
occurs when an informed party sends an indicator of his or her hidden
characteristics to an uninformed party in an attempt to provide information about
these hidden characteristics.
Blank 1: common
Blank 1: Signaling
Blank 1: 2000 or 2,000
English
Dutch
First-price, sealed bid
Second-price, sealed-bid
they are reliable.
they are observable.
they are difficult to mimic.
True
Signaling
Correlated value estimates
The timing of the bidder's
decisions The amount the winner
pays
To signal the hidden qualities of the product.
bid less than his or her valuation of the item.
The player bids his own valuation of the item.
Bidders learn the valuation of others through the auction
process. Bidders don't know the valuations of others.
Bidders don't know their own valuations.
Why do producers offer money-back guarantees?
Why might individuals include the letters, Ph.D after their names?
What is the optimal bidding strategy for a second-price, sealed-bid auction?
Why is it expressly more difficult to determine optimal bidding strategies with
correlated values than with independent private values?
The optimal bidding strategy for a first-price, sealed bid auction is for the bidder to
True or false: One of the reasons it is more difficult to determine the optimal bidding
strategy in auctions with correlated values is that bidders do not know their own
valuations of the item.
An auction environment where bidders know neither their own valuation of the item
nor the other bidders' valuation of the item.
Given independent private values, the expected revenues of the auctioneer in a
first-price auction,
Given independent private values, the expected revenues of the auctioneer in an
English auction
equal those in a Dutch auction.
Blank 1: affiliated or correlated
are the same as a second-price
auction. are the same as a first-price
auction.
Consider the following statement:
"The higher one bidder's value estimate, the more likely it is that other
bidders have high value estimates."
This statement describes value estimates.
