A client (the principal) is trying to determine the best possible contract to enter into with her lawyer (the agent). The principal makes the following assumptions: the dollar amount of a judgment favoring the client is x and the probability of winning is 0. The lawyer has offered to (1) work for a fixed fee of F. (i) pay the client a fixed fee of F and keep the remainder of the judgment, and (ii) work for a contingent fee or a share of the contract with lawyer's share being a If the principal is highly risk-averse and is interested in production efficiency she will choose
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- Suppose that the expected value of weekly profits for an ice cream shop, before paying the manager, Amy, is where e is Amy's weekly avertime hours. Amy is risk-neutral but incurs a cost for working overtime. Thus, tatal expected surplus is What level of effort maximizes total surplus? The value of overtime that maximizes total surplus is e-hours. (Enter your response rounded to one decimal place.) E(x)=500+10c C(e)=² E(S)-[(x)-C(e).Bill has been adjudicated by the court to be mentally incompetent. Any contract that bill would enter into would be void? True or false2) Insurance Contract A risk averse individual faces a risk. The individual's utility function is U(W)= In(W) where W is the wealth of the individual. The individual has an initial amount of wealth of 1000$. 20% of the time, the individual will lose 200$. The other 80% of the time, his wealth remains at its initial level. a) An insurer offers a premium of 50$ to the individual. Should the risk averse individual accept the deal? b) Now suppose that the risk averse individual has an initial wealth of 400$ instead of 1000$. The premium is still 50$. Should he accept the deal? c) Would a risk neutral individual accept a premium of 50$? Show why or why not by calculating the expected utility of the risk neutral individual.
- A risk-neutral plaintiff in a lawsuit must decide whether to settle a claim or go to trial. The defendants offer $50,000 to settle now. If the plaintiff does not settle, the plaintiff believes that the probability of winning at trial is 50% if the plaintiff wins, the amount awarded to the plaintiff is X Will the plaintif settle if x is $62,500? What if X-$250,000? What is the critical value of X that would make the plaintiff indifferent between setting and going to trial? it the plaintiff were risk averse instead of risk neutral, would this critical value of X be higher or lower? If the amount to be awarded at trial with a win (X) were $62,500, then the plaintiff would settle If the amount to be awarded at trial with a win (X) were $250,000, then the plaintiff would not settle The critical value of X that would make the plaintiff indifferent between settling and going to trial is $ (Enter your response using rounded to wo decimal places)Sophie is offered a performance based wage that will either be equal to $4,200 or to $3,600, each with a probability of 50%. Sophie says that getting $3,900 for certain would be as good as being offered that random wage. Which, of the following sentences, is true? options: Sophie is risk averse and her risk premium is zero. Sophie is risk neutral and her risk premium is zero. Sophie is risk averse and her risk premium is $300. Sophie is risk neutral and her risk premium is $300.A seller has an indivisible asset to sell. Her reservation value for the asset is s, which she knows privately. A potential buyer thinks that the assetís value to him is b, which he privately knows. Assume that s and b are independently and uniformly drawn from [0, 1]. If the seller sells the asset to the buyer for a price of p, the seller's payoff is p - s and the buyer's payoffis b - p. Suppose the buyer makes a take-it-or-leave-it offer p to the seller. What's the optimal offer if the buyer's value is b = 1/2?
- A seller has an indivisible asset to sell. Her reservation value for the asset is s, which she knows privately. A potential buyer thinks that the assetís value to him is b, which he privately knows. Assume that s and b are independently and uniformly drawn from [0, 1]. If the seller sells the asset to the buyer for a price of p, the seller's payoff is p-s and the buyer's payoffis b-p. Suppose simultaneously the buyer makes an offer p1 and the seller makes an offer p2. A transaction occurs if p1>=p2, and the transaction price is 1/2 (p1 + p2). Is the following strategy profile a Bayesian Nash equilibrium: the buyer chooses p1 = 1/2 if b>=1/2 and he chooses p1=0 if b<1/2; the seller chooses p2=1/2 if s<1/2 and she chooses p2=1 if s>1/2. Why or why not? Can there be a Bayesian Nash Equilibrium in which the transaction price is .9 whenever there is a transaction? Why or why not?1. A whole life insurance on (55) pays a benefit of 600 at the end of the year of death. You are given: (i) 0.015 0≤t≤20 μ55(t) 1 2016. The market consists of only two assets, A and B, with normally distributed re- turns. Asset A's returns have a mean of 18% and a standard deviation of 14% and Asset B's returns have a mean of 15% and a standard deviation of 18%. In such a scenario a risk-averse investor would always want to invest all of her money in Asset A. 17. A call option offers the purchaser limited downside loss as given by the option premium paid, combined with limited upside potential. 18. The return earned on a risk free portfolio must be equal to the risk free interest rate. 19. CAPM assumes that all investors' optimal portfolio has a fraction invested in the risk-free asset and the remaining in the minimum variance portfolio. 20. For any frontier portfolio p, except the minimum variance portfolio, there exists a unique frontier portfolio with which p has zero covariance. 21. The market portfolio of all available assets is the supply of risky assets. 22. An arbitrage opportunity is an…4. A taproom owner is trying to determine how to structure his manager's compensation. One option he considers is a flat salary of $70,000 per year. The second option is a base salary of $30,000 plus 15% of the taproom's profit. If the manager puts a lot of effort into her job, the taproom's annual profit will be $500,000 with 75% probability and $100,000 with 25% probability. If the manager exerts only modest effort, the taproom's profit will be $500,000 with 25% probability and $100,000 with 75% probability. The manager's opportunity cost of putting a lot of effort into her job is $50,000, while her opportunity cost of exerting only modest effort is $25,000. a. Draw the game tree for the interaction between the taproom owner and the manager. Assume that the taproom owner moves first. b. What is the equilibrium outcome for this game? What kind of contract should the taproom owner offer? What level of effort will the manager choose? Explain.Andrew is considering taking one of two jobs. The first job pays $90,000 as base pay, but there is a 25% chance of getting a further bonus of $54,400. The second job pays $102, 500 for sure. Andrew is risk averse, and his utility from income is v(I) = √I. (a) What is the lottery over income levels that Andrew faces if he takes the first job? (b) What is the expected value of Andrew's income if he takes the first job. (c) Which job gives a higher expected utility. (d) Suppose it is possible to buy insurance against the risk of not getting the bonus. The insurance company charges a premium and pays AndrewExplain the different between takaful and insurance.SEE MORE QUESTIONS