Sarah buys little stuffed animals for $5 each. They come in different varieties. If the producer stops making (retires) a certain variety, a stuffed animal of that variety will be worth $100; otherwise it is worth $0. There is 25% chance that any variety will be retired. For the purchase of an individual animal, what is the value to Sarah of knowing ahead of time whether or not that variety will
be retired?
What will be an ideal response?
If Sarah did not know whether a variety is to be retired, her expected value of a purchase is (.75 ? -5 ) + (.25 ? 95 ) = -3.75 + 23.75 = $20.
If she knows ahead of time that a variety won't be retired, she won't buy one. So, her expected value becomes (.75 ? 0 ) + (.25 ? 95 ) = $23.75.
The information that a variety will or will not be retired is worth $3.75 to her.
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What will be an ideal response?
Which of the following would be considered a "leisure" activity by economists?
A. Driving an on-duty taxi. B. Driving to the movies. C. Driving a forklift for work. D. Driving a bus for a city.
The misperception effect explanation for an upward-sloping short-run aggregate supply curve is based on: a. falling profit margins as the price level rises
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Two suspected drug dealers are stopped by the highway patrol for speeding. The officer searches the car and finds a small bag of marijuana and arrests the two. During the interrogation, each is separately offered the following: "If you confess to dealing drugs and testify against your partner, you will be given immunity and released while your partner will get 10 years in prison. If you both
confess, you will each get 5 years." If neither confesses, there is no evidence of drug dealing, and the most they could get is one year each for possession of marijuana. If each suspected drug dealer follows a dominant strategy, what should he/she do? a. Confess regardless of the partner's decision b. Confess only if the partner confesses c. Don't confess regardless of the partner's decision d. Don't confess only if the partner doesn't confess