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17-2 Game Show Uncertainty In the final round of a TV game show, contestants have a chance to increase their current winnings of 1 million dollars to 10 million dollars. If they are wrong, their prize is decreased to $100,000. To win, they have to guess the exact percentage that answered a question a certain way, and the range has already been narrowed to an 11-point range. So, for example, the contestant knows that the correct answer is between 20% and 30% and he or she must guess the correct percentage in that range. So, let's say you have no idea what the right answer is and have to make a random guess. Should you play? CHAPTER 17 MAKING DECISIONS WITH UNCERTAINTY 231 17-3 Boat Insurance Maritime Insurance Company offers insurance policies for recreational boats. A typical policy will pay the replacement cost of $25,000 if the boat is a total loss. If the boat is not a total loss but the damage is more than $10,000, the policy pays $5,000. For damage under $10,000, no coverage is offered. The company estimates the probability of no damage to be 0.60, the probability of damage between $0 and $10,000 to be 0.25, and the probability of damage between $10,000 and $25,000 to be 0.12. If the company wants to make a profit of $200 above the expected cost, what should be the price of the policy?
Determine the Net Present Value of the cash flow at annual interest rates of 15%, 20%, and 30%. At what (interpolated) rate would the NPV become zero What is such a rate called Also, calculate the payback periods
Paul consumes only two goods, pizza (P) and hamburgers (H) andconsider them to be perfect substitutes, as shown by his utilityfunction: U(P,H) = P+4H. The price of pizza is $3 and the price ofhamburger is $6,
Use ROR analysis to determine whether it is better to sell the rights to the property today (time zero), or begin development using either the "A" or "B" scenarios. Assume the investor is seeking a nominal before-tax minimum ROR of 10%. Verify you..
An asset for drilling was purchased and placed in service by a petroleum production company. Its cost basis is $60,000, and it has an estimated MV of $12,000 at the end of an estimated useful life of 14 years. Compute the depreciation amount in th..
a. What is Quick's taxable gains b. What is Quick's taxable income c. What is Quick's marginal and effective (average) tax rate d. What is Quick's net cash flow after tax
For three years, there was no technological change in Longland but capital per hour of labor increased from $10 to $20 to $30 and real GDP per hour of labor increased from $3.80 to $5.70 to $7.13. Then, in the fourth year, capital per hour of labo..
Suppose that investment is $130, saving is $110, government expenditure is $120, exports are $210, and imports are $220. How to calculate the tax revenue and government budget balance?
Patton Paints Corporation has a target capital structure of 30% debt and 70% common equity, with no preferred stock. Its before-tax cost of debt is 11% and its marginal tax rate is 40%. The current stock price is P0 = $33.00. The last dividend was..
Consider two firms that act as Cournot competitors and face the inverse demand function p(.), where p'(Y1 + Y2) 0 i = 1,2.
Show the effect of tax credit graphically, assuming the $4,000 credit is a Pigouvian subsidy. Label the graph correctly and explain how this tax credit will affect each of the curves, equilibrium price, and quantity.
Suppose that every additional five percentage points in the investment rate (I/GDP) boost economic growth by one percentage point. Assume also that all investment must be financed with consumer saving.
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