Answer the following 3 questions. (2 multiple choices and 1 essay question) For the multiple choice questions, you need to EXPLAIN YOUR ANSWER IN WORDS. For the essay question, no words limited , just fully answer it should be good, I need it in 10 hours.
1. Both Nadia and Samantha are applying to insure their car against theft. Nadia lives in a secure neighborhood, where the probability of theft is 10%. Samantha lives in a lesser secure neighborhood where the probability of theft is 25%. Both Nadia and Samantha own cars worth $10,000, and are willing to pay $100 over expected loss for insurance. Suppose the insurance company cannot tell them apart but expects them to be different values and charges them an average premium of $1850. How much profit would it make?
A. 1850 B. Zero-they would break even C. They would make a loss of $650 D. They would make a loss of $1100
2. Relative to a manager of a company owned store, a franchisee is more likely to
A. Work very hard B. Not work as hard C. Work only evenings D. Work only night shifts
3. Suppose that, as an owner of a federally insured S&L in the 1980s, the price of real estate falls, and most of your loans go into default. In fact, so many loans go into default that the net worth of the S&L is negative ($5 million). Federal regulators haven’t realized this yet, but they will shortly. As a last-ditch attempt to save the bank, you attract $1 million in new deposits with very generous interest rates to depositors. You have two possible investments you can make with the $1 million. You can invest in the stock market, which will pay $4 million with probability 0.5 and $2 million with probability 0.5. Alternatively, you can invest in junk bonds, which pay off $10 million with probability 0.1 and $0.5 million with probability 0.9.
(a) Which investment has the highest expected value to ordinary investor?
(b) Which investment has the highest expected value to S&L owner? [Hint: Federal deposit insurance limits an S&L’s losses to zero.]
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