problem set 2

# 4 probability of earning 33000 should she take the

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Unformatted text preview: a new job that o¤ ers a 0.6 probability of earning \$44,000 and a 0.4 probability of earning \$33,000. Should she take the new job? (c). In (b), would Natasha be willing to buy insurance to protect against the variable income associated with the new job? If so, how much would she be willing to pay for that insurance? (Hint: What is the risk premium?) Exercise 15 A city is considering how much to spend to hire people to monitor its parking meters. The following information is available to the city manager: Hiring each meter monitor costs \$10,000 per year. With one monitoring person hired, the probability of a driver getting a ticket each time he or she parks illegally is equal to .25. With two monitors, the probability of getting a ticket is .5; with three monitors, the probability is .75; and with four, it’ equal to 1. s The current …ne for overtime parking is \$20. (a). Assume …rst that all drivers are risk neutral. What parking …ne would you levy, and how many meter monitors would you hire (1, 2, 3, or 4) to achieve the current level of deterrence against illegal parking at the minimum cost? (b). Now assume that drivers are highly risk averse. How would your answer to (a) change? 2 3 Critical Thinking Exercise 16 (a). Four USC students must decide on which two of them will be roommates in a dorm. The four students have the following preferences: Student 1 : Student 2 > Student 3 > Student 4; Student 2 : Student 4 > Student 1 > Student 3; Student 3 : Student 1 > Student 2 > Student 4; Student 4 : Student 1 > Student 2 > Student 3: If you are the administration manager who aims to design an optimal matching scheme for this group of students. What is your decision of allocating these students? (b). Now consider another 4 students with the following preferences: Student 1 : Student 2 > Student 3 > Student 4; Student 2 : Student 3 > Student 1 > Student 4; Student 3 : Student 1 > Student 2 > Student 4; Student 4 : Student 1 > St...
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