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A manufacturer must decide whether to extend credit to a retailer who would like to open an account with the firm. Past experience with new accounts indicates that 45% are high risk, 35% are moderate risk and 20% are low risk customers. If credit is extended the manufacturer can expect to lose $60,000 with a high risk customer, make $50,000 with a moderate risk customer and make $100,000 with a low-risk customer. If the manufacturer decides not to extend credit to a customer, the manufacturer neither makes nor loses money. Prior to making a credit extension decision the manufacturer can obtain a credit report on the customer at a cost of $2000. The credit agency will rate the retailer as belonging to low, medium or high risk categories. The credit agency admits that its ratings are not perfect. In particular they will rate a low risk customer as moderate risk with probability 0.10 and as a high risk customer with probability 0.05. Furthermore they will rate a moderate risk customer as low risk with probability 0.06 and as a high risk customer with probability 0.07. Finally the rating procedure will rate a high risk customer as low risk with probability of 0.01 and as medium risk with probability 0.05.
Draw the decision diagram and find the strategy that maximizes the manufacturer’s expected net earnings.
Compute the EVSI and EVPI for this decision problem.
Re-evaluate the tree using an exponential utility function with R=$5000 and determine the expected value of the utility and its certainty equivalent. Did the decision change?
Explain the advantages of specialization and trade in international economics. Explain how economic growth and international trade increase consumption possibilities.
Suppose that the cost of eradicating polio from a society of 1,000 persons is $5 per person. Also suppose that only two persons in that society will benefit from that policy, and the benefit to each of those persons is $2,000. Then what is the social..
Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous. d. Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.
q1. bob consumes two commodities x and y say chocolate and classical music. more y never hurts but in order to enjoy y
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Suppose that the most popular car dealer in your area sells 10 percent of all vehicles. If all other car dealers sell either the same number of vehicles or fewer, what is the largest value that the Herfindahl index could possibly take for car dealers..
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Explain how total output of the goods can increase when the countries switch to specializing in production of one good rather than dividing their workers evenly between the goods.
Arguments for public subsidies for education are based upon: The cobweb model of educational attainment is most likely to be applicable when:
Ear Us production function is Q=KL. The company over the years uses input rates of 60 and 75 for capital and labour respectively. The price of capital is $40 and labour is $35 per ear phone. If $58000 is allocated to production, what is the maximum o..
A linear cost per week
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