At a company, 20 employees are making contributions for a retirement gift. Each of the 20 employees is choosing how many dollars to contribute from the interval [0,10]. The manager of these 20 employees announces that she will contribute d dollars for every dollar that an employee contributes. The payoff to employee i who makes contribution of x; dollars is b;(1+ d)x; – xi, where b; > 0. Assume that d = 2, b; = 0.25 for i = 1,2, ... , 10, and b; = 0.5 for i = 11, 12, . .. , 20 What is the best contribution level of any employee i for i = 1, 2,., 10.
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- Assume that the parcels are essentially identical and that the minimum selling price of each is $575,000. The following table states each person's willingness and ability to purchase a parcel. Willingness and Ability to Purchase Person (Dollars) Andrew 520,000 A-Z Beth 510,000 Lorenzo 750,000 Neha 660,000 Sam 600,000 Teresa 550,000 Which of these people will buy one of the three beachfront parcels? Check all that apply. O Andrew Beth O Lorenzo O Neha O Sam O Teresa Assume that the three beachfront parcels are sold to the people that you indicated in the previous section. Suppose that a few days after the last of those beachfront parcels is sold, another essentially identical beachfront parcel becomes available for sale at a minimum price of $535,000. This fourth will nurchase it from the seller for at least the minimum ncice be sold because parcel MacBook Air F12 O O O8 An investor with initial wealth $20000 and utility function U(x) = ln(x) is considering an investment that has a 80% chance of gaining r% and a 20% chance of losing s%. (1) Find in terms of r and s the certainty equivalent of this investment. (2) If s = 10, find the range of values of r for which the investor will avoid this investment.,4) You are a financial professional working in a corporate loan department. A company named Mitch Hedberg Inc. (MH) comes to you for a loan. MH has debt from a previous loan (given by a different firm than yours) of 200. Your company analysts say that MH is likely to earn either 180, 240, or 300 this year - each with a probability of 1/3. MH wants you to lend them 100. MH could use this borrowed 100 to do either project X or project Y. Project X has a guaranteed return of 125 if the 100 is put there. Project Y may return either 0 or 210; each has probability of 1/2 and also costs 100 to do. a) Which project, X or Y, has the larger expected value? b) If you lend MH the 100, what will they do with the money? Why? Show your math. c) Should you lend MH the money or not? Show your math. d) Why did I choose the letters "MH" for this problem? What financial economic concept with initials "MH" is important in this problem?
- The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, andtwo years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of£) as a function of the price of the bond is S = 2P + 400. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantitydemanded/supplied at this interest rate? What happens to the demand/supply of the bond asthe interest rate increases? Explain why. c) What is the equilibrium interest rate? d) Suppose that the bond trades at premium. Is there excess demand or supply? Explain.e) There is a business cycle expansion, so both supply and demand shifts. After the shift, thenew demand curve is given by: D = 4000 + X − 2P, whereas the new supply curve is S =2P + 200. For which values of X will the interest increase/decrease? Which values of X arein line with empirical data?Becky is deciding whether to purchase an insurance for her home againtst burglary. the payoff for her is shown as follow: Net worth of her Net worth of her home: $ 20000 burglary(10%) Net worth of her Net worth of her home: $50000 burglary (90%) The insueance would cover all the loss from burlary and the insurance fee is $8000. Her utility funtion is given as u=w ^0.3 Should Beck purchase the insurance Explain.The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, andtwo years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of£) as a function of the price of the bond is S = 2P + 400. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantitydemanded/supplied at this interest rate? What happens to the demand/supply of the bond asthe interest rate increases? Explain why. c) What is the equilibrium interest rate?
- Young MBA Erica Cudahy can invest up to $20,000in stocks and loans. Each dollar invested in stocksyields $0.08 profit, and each dollar invested in a loanyields $0.13 profit. At least 40% of all money investedmust be in stocks, and at least $7000 must be in loans.Determine how Erica can maximize the profit earnedon her investments.a) Suppose you put $350 into a bank account today. Interest is paid annually and the annual interest rate is 6 percent. What is the future value of the $350 after 4 years? b) Suppose you are deciding whether to buy a particular bond from your local municipality. If you buy the bond and hold it for 4 years, then at that time you will receive a payment of $10,000. Assume the interest rateis6percent. Underwhatcircumstanceswillyoubuythebond?Meaninguptowhatpriceareyou willing to pay.Sam, after taking a $200 loan from the bank to finance an investment that pays $1000 50% of the time and $0 50% of the time at a 100% interest, discovers another riskier investment that pays out $5,000 but only 10% of the time, while the other 90% of the time it pays zero. Would the he want to switch to the riskier investment? Question 4 options: Yes because his return has increased No because his liability to the bank has increased No because his return has decreased None of the above
- a. Suppose that you took part in a lottery that has a chance to increase, decrease or have no effect on your level of income. With probability 0.5, your income remains at it original level K500; with 0.2 probability, your income increases to K700; and with probability 0.3, your income decreases to K400. The utility function is.u(1) =I^0.7where I denote income leveli.Using the utility function show that the consumer's risk preference is averse. (2marks)ii.Calculate both the EU and EV of the income. (4marks)iii.Using the results in (il) above, indicate the attitude to risk of this consumer. (2marks)4. A taproom owner is trying to determine how to structure his manager's compensation. One option he considers is a flat salary of $70,000 per year. The second option is a base salary of $30,000 plus 15% of the taproom's profit. If the manager puts a lot of effort into her job, the taproom's annual profit will be $500,000 with 75% probability and $100,000 with 25% probability. If the manager exerts only modest effort, the taproom's profit will be $500,000 with 25% probability and $100,000 with 75% probability. The manager's opportunity cost of putting a lot of effort into her job is $50,000, while her opportunity cost of exerting only modest effort is $25,000. a. Draw the game tree for the interaction between the taproom owner and the manager. Assume that the taproom owner moves first. b. What is the equilibrium outcome for this game? What kind of contract should the taproom owner offer? What level of effort will the manager choose? Explain.Person A, Person B and Person C own stock in the same company. All of them are loss averse and have the same value function: v(x) = x/2 for gains and v(x) = 2x for losses. The stock's price is shown in the graph below Stock Price 100 90 80 95 80 90 70 70 60 60 50 50 40 30 20 10 0 October November December January Feburary March (a) (b) O Person A bought the stock in November and uses the purchase price as their reference point. If you ask them, how much would they say that they lost in terms of value when the price dropped from £95 to £70? Person B bought the stock in October and uses the peak price as their reference point. If you ask them, how much would they say that they lost in terms of value in January? In January, which month should Person B rather use as reference point in order to maximize their value? (d) [ Person C bought the stock in March. They expect to derive a value of at least +5 in April as compared to their reference point of the purchase price. What is the minimum…