Chapter 19, Decisions Involving Uncertainty Video Solutions, Principles of Microeconomics

Problem 1

You are thinking about funding a Kickstarter campaign for a hybrid mechanical/digital calendar for which you're willing to pay $$\$ 125$$. To receive a calendar, the company required that you pledge $$\$ 100$$. You think there's about an $80 \%$ chance of the company succeeding, but if the product fails, you will not receive a refund. Is this a fair bet? Would you pledge the $$$ 100$$ ? Hint: Use your consumer surplus if the company succeeds to evaluate the bet.

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01:09

Problem 2

You are considering investing $$\$ 2,000$$ in the stock market. If you invest, there is a $30 \%$ probability that your investment will be worth $$\$ 3,000$$ and a $70 \%$ probability that your investment will be worth $$\$ 1,600$$. Alternatively, if you did not invest, you simply keep the $$\$ 2,000$$. Would you invest? What does your decision indicate about how you view risk?

Jennifer Stoner

Numerade Educator

00:42

Problem 3

You are preparing to declare your major (if you already have, this will still be a good reflection exercise to make sure you're making a good decision!). Apply the five strategies to reducing risk in your life to this decision. Which strategies can you use to help you reduce the risk of choosing the wrong major for you? How would you apply them?

Maxime Rossetti

Numerade Educator

02:48

Problem 4

There were about 126 million households and 383,974 residential fires in the United States in 2017. Therefore, households faced a $0.30 \%$ chance of a fire in a year. You are looking at purchasing renters insurance that costs $\$ 100$ a year and provides you with $\$ 20,000$ a year in coverage in the event of a fire. Is this policy actuarially fair? Would you buy the policy? Why or why not?

Christopher Stanley

Numerade Educator

Problem 5

You're a project manager overseeing five teams that are developing a new app. Each team must complete their work by July 1 in order to release the app by the end of the year. Based on your work managing the project, you know that each team has about a $75 \%$ chance of meeting the deadline.
a. At your weekly status meeting, the CEO turns to you and says, "Give me your gut reaction: What are the chances we actually get this done by the end of the year?" How do you answer?
b. Now work out the answer with a calculator. You can either multiply 0.75 five times or raise 0.75 to the power of five. Was your estimate correct, too high, or too low? What aspect of behavioral economics could explain your gut reaction?

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