Suppose a \"lemons\" car is valued at $2500 and a good car is valued at $5000. I

Question

Suppose a "lemons" car is valued at $2500 and a good car is valued at $5000. If you know that there is a 50% chance of getting each, what is t he expected value of the car. what will happen in the market if the price is based on the expected value. Explain. Suppose you haw hired a new worker, unfortunately you do not know if the worker is a shirker or a hard worker. Suppose working hard raises the probability of making a sale from 40% to 80% (thus raises the probability of making a commission C by the same percentage). If the cost of working harder is $200,what commission C should you offer the worker to provide an incentive to work hard.

Explanation / Answer

1(a) Expected Value = Probability *(Price1+Price2)

                              = .5*(5000+2500)

                              = 3,875

1(b)

Expected Value is the anticipated value for a given investment. The expected value is calculated by multiplying each of the possible outcomes by the likelihood(probability) that each outcome will occur, and summing all of those values to arrive at result. By calculating expected values, investors can choose the scenario that is most likely to give them their desired outcome.

If the pricing is based on expected value, the market can reach perfect competition state since the value of utility would be satisfied by the customers. It also helps the business to calculate its own requirement of supply based on the probability analysis.

1(c)

Expected Commission = Cost of working harder * Change in probability of making sale

                                 = $200 * 40%

                                = $80

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.