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Unformatted text preview: Suggested answers for Exam #1, February 8, 2005 Now, while I hope everyone turns in a perfect paper, that will not happen. So remember that after this exam, you still have 75% of your grade to be determined. This means that if you did a great job, keep up the good work! If you did not do a good job, you still have a strong chance to get a good grade. 1. OK, so on Sunday the Patriots beat Philly, but the game was close! As such, Bob will bet 3:2 that in the first game the two teams play next fall, Philly will win. Sue does not believe this: she is willing to bet 2:1 that the Patriots will win. a. You are willing to bet $ 100, so how should you bet to ensure a fixed income no matter what happens? Answer: Bet $x with Bob and $100x with Sue. If Philly wins, your winnings are x + 2(100 x ) = 200 3 x. If the Patriots win, your winnings are 3 2 x (100 x ) = 5 2 x 100 . Therefore, to have a guaranteed fixed winning, set both equations equal to get 200 3 x = 5 2 x 100 or 300 = 11 2 x. This means that x = 600 11 (that suffices for the answer, but the value is about $54.55.) and 100 x = 100 600 11 . b. What is your profit? Answer: it is 200 3 600 11 , or 5 2 ( 600 11 ) 100, (either of which is an accepted answer) or about $36.36. c. If Sue believes she is making a fair bet, what probability does she assign to the Patriots winning? Show the computation: just an answer will not suffice....
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This note was uploaded on 02/04/2009 for the course ECON 133 taught by Professor Saar during the Spring '09 term at UC Irvine.
 Spring '09
 saar

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