tut 5 memo - b Value of bike = ½ x R160 ½ x R0 = R80 c...

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SOLUTION TO TUT 5 ECO2003F 2009 1. The following would be possible answers. a. A heavily advertised limo has more sunk costs and is likely to be more permanent. b. The teenagers' dress and their low price may signal possible fraud. c. The full-disclosure principle brought out everyone's reason for travel. d. The pilot tells everything, so people won't fear the worst (full-disclosure principle). e. The newcomer stigma is suggesting to Matt that the new decoration may be because of a fire problem or another flaw in that floor of the hotel. f. Adverse selection brought the losers to Matt's first session. g. The person wanting to eat lunch probably was free because he had little to offer Matt. h. The lemons principle keeps good employees out of job fair-type operations. i. The lemon principle suggests that the used-only dealers get the castoffs. j. Large booths and door prizes are conspicuous ways of signaling success. 2 a) Utility function is convex, so a risk seeker
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Unformatted text preview: b) Value of bike = ½ x R160 + ½ x R0 = R80. c) U (no deal) = ½ (160) 2 + ½ (0) 2 = 12 800 U (deal) = (160-50) 2 = 12 100 So, doesn’t make sense to take the bike check offer. (d) U(160-x ) 2 = 12 800  x = = R46.87 3 a) EU = ( 144)/2 + ( 81)/2 = 10.5 < 111 = 10.536, so Xolani will not make the investment. 3. b) With 2 equal partners, EU = [ ( ) 111 11  ] /2 + ( 101) /2 = 10.55 > 111, so Xolani will make the investment. 4. With one trip, EU 1 = (1/2) 100 + (1/2) 0 = 5 With two trips, there are four equally likely outcomes: First Trip Second Trip Income Probability 1. 0 break 0 break 100 1/4 2. 500 break 0 break 50 1/4 3. 0 break 500 break 50 1/4 4. 500 break 500 break 0 1/4 EU 2 = (1/4) 100 + (1/4) 50 + (1/4) 50 + (1/4) 0 = 2.5 + 1.77 + 1.77 = 6.04 So it is better to take two trips than one, even though the expected number of eggs broken is the same either way. (Moral: Don't put all your eggs in one basket!)...
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This note was uploaded on 05/23/2011 for the course ECON 203 taught by Professor Jules during the Spring '11 term at University of Cape Town.

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