Mock Final Exam answers

And what is the nash equilibrium 3pt answer

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Unformatted text preview: k (50%) Good Luck (50%) Cost of Effort share over $40 Low Effort 0 0 0 Medium Effort 0 9.8 3 High Effort 14.2 19 5 On the other hand, Annie's profit after paying Jonathan is given as: Fixed: Bad Luck (50%) Good Luck (50%) Low Effort -$10 -$8 Medium Effort -$10 $4 High Effort $14 $28 30% share: Bad Luck (50%) Good Luck (50%) Low Effort $0 $0.14 Medium Effort $0 $9.8 High Effort $16.8 $26.6 40% revenue Bad Luck (50%) Good Luck (50%) share over $40: Low Effort $0 $2 Medium Effort $0 $1.2 High Effort $4.8 $14 Annie's profit is maximized when Jonathan exerts high effort and she pays him 30% profit share. From Jonathan's revenue tables, we can see that he is motivated to exert maximum effort under 30% profit share. Hence, Annie should pay him 30% profit share. 5. Uncertainty Jon is enrolled in COMM 292. His final grade depends on two variables: the amount of effort he puts in, and his luck, as shown in the table below: Bad Luck (50%) Good Luck (50%) Cost of Effort Low Effort 0 60 0 Medium Effort 70 95 10 High Effort 90 100 25 a) Jon's utility function is U=G0.7-2C, where G is his grade and C is his cost of effort. Assuming Jon is rational and always maximizes his utility, based on these information, would you say Jon is a try-hard (always works hard), average student (puts in medium effort), or a slacker (doesn't work hard at all)? (4pt) Answer: Low effort: U=50%00.7+50%600.7-20=8.78 Mid effort: U=50%700.7+50%950.7-210=1.90 High effort: U=50%900.7+50%1000.7-225=-3.33 Because Low > Mid > High, therefore Jon prefers low effort. Thus he is a slacker. b) Research shows that the more effort one puts in, the better luck he or she gets. While bad luck and good luck at low effort both remain at 50%, at medium effort and high effort they are now respectively 40%/60% and 20%/80%, respectively. How does this change your evaluation of Jon? (4pt) Answer: Low effort: U=50%00.7+50%600.7-20=8.78 Mid effort: U=40%700.7+60%950.7-210=2.37 High effort: U=30%900.7+70%1000.7-225=6.00 Because Low > High > Mid, therefore Jon prefers low effort. Thus he is still a slacker. c) Ratna really wishes to encourage Jon to work hard. He tells Jon that he would give him a final grade of X for sure if Jon is will to put in high effort. What is the minimum value of X for this offer to work? What is Jon's risk premium? (Assuming the utilities from part b.) (7pt) Answer: Low effort: U=50%00.7+50%600.7-20=8.78 Mid effort: U=40%700.7+60%950.7-210=2.37 High effort: U=30%900.7+70%1000.7-225=6.00 Because Low > High > Mid, therefore Jon prefers low effort. Thus he is still a slacker. Substitute the maximum utility (low effort) into the original utility function, with the effort cost of high effort: U=G0.7-2C= G0.7-2X25=8.78 Then solve for G. G=336.91 Risk Premium=EV of Low Effort-G=30-336.91=-306.91%...
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This document was uploaded on 03/15/2014 for the course COMM 295 at UBC.

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