Ture or False & explain why 1. For a risk lover, the certainty equivalent of a g

Question

Ture or False & explain why 1. For a risk lover, the certainty equivalent of a gamble will equal the expected value of 2. Hyperbolic discounting implies patience over short time horizons, and growing 3. In the dictator game, in practice the second player often rejects offers made to them 4. Reverse auctions involve sellers making price offers for the sale of a good, with the the gamble impatience after that. by the first player lowest offers being accepted by the buyer. These auctions face challenges when the quality of the good is not easily observable 5. A risk-neutral person will have a positive willingness to pay for fair insurance 6. By offering fair insurance, insurance companied should expect to make a profit. 7. In Spence's education model, low-skill workers may decide to pursue higher education For a monopoly, the inverse elasticity rule suggests that the mark-up of price over marginal cost should be smaller when demand is more price elastic. The market line shows market possibilities in terms of expected risk and expected return. Investors are likely to differ in terms of where they wish to locate their investment portfolios along the market line 8. 9.

Explanation / Answer

As per rules I will answer the first 4 subparts of the question

1.False

Risk premium of a gamble is the difference between the expected value of the gamble and its certainty equivalent. Risk lover will have negative risk premium since he needs extra incentive to accept the expected value.

2.False

Under hyperbolic discounting, people act more patiently when decisions are far away.Hence the people are impatient in short term and more patient thereafter.

3:False

There are 2 people in the dictator game. If the offer of the first player is rejected by the second player, neither player gets to keep any money. If accepted, the each player gets money as per the offer. Hence in practice, the second player would accept the offer.

4: False

Reverse auction is successful when price is the most important attribute. Hence this method will not face a challenge even if the quality is not observable by the buyer since the price is the dominating factor.

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