Midterm2007

# Midterm2007 - Midterm 2007 Question 1 (Each one is 3 points...

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Midterm 2007 Question 1 (Each one is 3 points – Totally 15 points) i. What is framing? What is its significance? ii. When assessing subjective probabilities, we use some sort of heuristics back in our mind. However, these heuristics have biases, hence leads us to wrong assessments. One of such heuristics is representativeness. Provide an example of the bias it yields. iii. One another such heuristic while assessing subjective probabilities, is availability. Provide an example of the bias it yields. iv. Do you think humans are expected value maximizers? Provide a reason for your reply. v. Do you think humans are expected utility maximizers? Provide a reason for your reply. Question 2 ( 25 points) After exploring the market, Mr. Mill discovers the following ten years investment opportunity in Boesky Enterprises (BE): a. Assuming Mill is risk neutral, what is the value of his deal? (5 points) b. Since Mill knows Ivan, head of BE, Mill can obtain perfect inside information on whether the stock will go up or down. What is the most Mill should pay for Ivan's inside information? (5 points) c. Mill also has inside contacts in the Security & Exchange Commission (SEC). However, this information is not perfect. When the stock price goes up, the SEC says 90% of the time that it will go up; when the stock price goes down the SEC says 90% of the time that it will go down. What is the most Mill Should pay for the information from the SEC? (10 points) d. Suppose that after obtaining the SEC information for \$2.75 million, Mill believes that the stock will go up. Given this information, what is the most Mill should pay for Ivan's information? (5 points) 1 up 0 \$200 -\$50 0.1 0.9 down \$30 -\$10 0.1 0.9 up down Go Big Go Small No Go Investment Stock Price Value in Millions

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Question 3 (10 points) You have been called to jury in a town where there are two taxi companies, Green Cabs Ltd. And Blue Taxi Inc. Green Cabs dominates the market, with 85% of the taxis on the road. On a misty winter night, a taxi sideswiped another car and drove off. A witness says it was a Blue Cab.
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## This note was uploaded on 12/19/2011 for the course ECON Econ203 taught by Professor Majdabpadawnan during the Spring '11 term at University of Maribor.

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Midterm2007 - Midterm 2007 Question 1 (Each one is 3 points...

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