Microeconomics Mock Q's 1-3
FHNW IM
FHNW IM
Kartei Details
| Karten | 86 |
|---|---|
| Sprache | English |
| Kategorie | BWL |
| Stufe | Universität |
| Erstellt / Aktualisiert | 29.06.2021 / 22.06.2024 |
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In your job for the private office of a wealthy family, you have to make rational investment decisions. Presently, you are faced with two investment opportunities. The first is an investment project with a sure payoff of 5,200,000. As your second option, you could invest the same amount in a highly risky investment project. If that project goes well, the return would be 12,800,000. However, if it fails, there will be no return whatsoever. According to your estimates, the probability of earning the 12,800,000 is 35 percent only.
Calculate the expected value of the highly risky investment project (i.e., the lottery
EV lottery = 0.35 12,800,000 + 0.65 0 = 4,480,000
In your job for the private office of a wealthy family, you have to make rational investment decisions. Presently, you are faced with two investment opportunities. The first is an investment project with a sure payoff of 5,200,000. As your second option, you could invest the same amount in a highly risky investment project. If that project goes well, the return would be 12,800,000. However, if it fails, there will be no return whatsoever. According to your estimates, the probability of earning the 12,800,000 is 35 percent only.
Given the family office (i.e., your employer) is risk averse and has a utility function determined by U = (Expected Value)0.5 , find the risk premium associated with the highly risky investment project (i.e., the lottery
0.35 12,800,0000.5 + 0.65 0 = (5,200,000 – RP) 0.5
1,252.2 = (5,200,000 – RP) 0.5
1,568,004.85 = 5,200,000 – RP
RP = 3,631,995.15
Explicate what is meant by the term “risk premium”.
The term “risk premium” describes the necessary difference between the expected value of a lottery and the payoff of a sure thing to make a risk averse decision maker indifferent between the lottery and the sure thing. It is the amount by which the payoff of the sure thing must decrease to make the decision maker indifferent between it and the lottery.
There are two countries, both producing the same goods in identical quality standards. The respective quantities produced per 100 labour hours (i.e. the monthly output of one worker) are given in the table below:
According to the data in the table above, which one of the following statements is correct?
If country B specialises in the production of that good where it has a comparative advantage, at which unit price is it most likely going to offer that good in country A, if one of the objectives is to drive competitors in country A out of business?
0.49 units of good 1
I. According to the theory of comparative advantage, free trade between two countries is mutually beneficial, if each country specialises in the production of those goods where the opportunity cost of producing another unit is only marginally higher than in the other country.
II. According to the theory of comparative advantage, free trade between two countries is mutually beneficial, if each country specialises in the production of those goods where the opportunity cost of producing another unit is lower than in the other country.
III. According to the theory of comparative advantage, free trade between two countries is mutually beneficial only, if at least one country has an absolute advantage in the production of one good.
