242s01q1 - 3 Suppose that you have a certain amount of money that you’d like to invest You’re considering putting your money in one of two

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ECONOMICS 242 QUIZ 1 SPRING 2001 PLEDGE:____________________________ NAME:______________________________ (5 points each) 1. Bob and Dan are both considering their end-of-year signing bonuses of $10,000. They have each decided to do one of four things with the money. a. Invest in swampland in Louisiana b. Make a down payment on a new 4x4. c. Take a cruise through Yugoslavia. d. Purchase a hang-glider. Dan has decided that his ranking of the options is a, b, c, d, while Bob ranks them b, d, a, c. Dan claims that Bob is irrational and vice versa. Who, in this case, is not rational? 2. In class, we mentioned that two ways in which a situation that initially does not have strategic interaction could be turned into a situation with strategic interaction is the presence of either mutual commitments or private information . Explain one of these two concepts.
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Unformatted text preview: 3. Suppose that you have a certain amount of money that you’d like to invest. You’re considering putting your money in one of two companies: Riskorama Inc , or Dull ‘n Steady Industries . If you invest in Riskorama , there’s a 20% probability that you’ll make $100,000 in profit, and an 80% probability that you’ll lose everything. If you invest in Dull ‘n Steady , you’ll make a certain profit of $15,000. a. What is the expected profit from investing in: Riskorama : Dull ‘n Steady : b. A friend of yours had a similar investment option, and she decided to invest in Dull ‘n Steady . What does this say about her preference for risk? Explain. 4. Consider the current bargaining going on between Israel and the Palestinians. Is the information in this strategic arena symmetric or asymmetric ? Explain....
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This test prep was uploaded on 04/22/2008 for the course ECON 242 taught by Professor Nonnenmacher during the Spring '06 term at Allegheny.

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242s01q1 - 3 Suppose that you have a certain amount of money that you’d like to invest You’re considering putting your money in one of two

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