There are two types of second hand laptop - good (G) and bad (B). A good...

There are two types of second hand laptop - good (G) and bad (B). A good laptop is worth €700 to James and a bad laptop is worth €200. Sarah has a laptop to sell. She values a good laptop as worth €400 and a bad laptop worth €0. a) If James is risk neutral and thinks there is 50 per cent chance Sarah has a good laptop should he buy the laptop from Sarah? b) What if he thinks there is a 30 per cent chance the laptop is good?

Expert Solution

a) James (buyer) values a good laptop at €700 and a bad laptop at €200.
Sarah (seller) values a good laptop at €400 and a bad laptop at €0.

The probability that the seller has a good laptop is 0.5 and 0.5 for bad laptop.

The expected value of the laptop for James is 700x0.5 + 200x0.5 = 450

Sarah will sell both both the good and the bad laptops if the price of the laptop, p 400 (her value for a good laptop).
Hence, James' expected payoff if he buys the laptop from her will be 450 - p.

Since 450 - p 0 for p(400,450), he can buy the laptop from Sarah as long as the price of the laptop is in the range (400,450).

b) If the probability that Sarah has a good laptop is 0.30, then the probability of a bad laptop is 0.70.

The expected value of the laptop for James will be 700x0.30 + 200x0.70 = 350

Payoff from buying a laptop from Sarah will be 350 - p, where p 400 (Sarah's value for a good laptop)
Now, 350 - p < 0 for all values of p 400. Therefore, James should not buy the laptop in this case.

We were unable to transcribe this image

Rahul Sunny answered 11 months ago

There are 200 people of two types on the road: good drivers and bad drivers. Good...

There are 200 people of two types on the road: good drivers and bad drivers. Good drivers (G) have a 1% chance of causing an accident while bad drivers (B) have a 5% chance of causing an accident. The proportion of bad drivers is 0.5, so the proportion of good drivers is 0.5. The cost of an accident is $6,000. Good drivers have a willingness to pay for insurance of $200 while bad drivers have a willingness to pay of...

Assume that a good second-hand car worths $10 to the seller and $12 to the buyer, an ordinary second-hand car worths $7 to the seller and $9 to the buyer, and a bad second-hand car worths $5 to the seller and $3 to the buyer.

Assume that a good second-hand car worths $10 to the seller and $12 to the buyer, an ordinary second-hand car worths $7 to the seller and $9 to the buyer, and a bad second-hand car worths $5 to the seller and $3 to the buyer. Assume that one third of the cars are good, one third are ordinary, and one third are bad.a. If the buyer can tell good or ordinary or bad, will the good cars sell? Will the...

Assuming that there are two types of radios on the market: good radios and bad radios....

Assuming that there are two types of radios on the market: good radios and bad radios. Of the firms that manufacture radios, 50% produce good radios and 50% produce bad radios. A good radio does not break for five years, while a bad radio has a 50% chance of breaking when it is first used. If the bad radio does not break immediately, it works for five years, just like the good radio. A good radio is worth $100 to...

Assume that there are two types of radios on the market: good radios and bad radios....

Assume that there are two types of radios on the market: good radios and bad radios. Of the firms that manufacture radios, 50% produce good radios and 50% produce bad radios. A good radio does not break for five years, while a bad radio has a 50% chance of breaking when it is first used. If the bad radio does not break immediately, it works for five years, just like the good radio. A good radio is worth $100 to...

1. Good versus Bad Debt. Is there such a thing as good debt, what types of...

1. Good versus Bad Debt. Is there such a thing as good debt, what types of debt do you consider to be "good"? What types do you consider to be "bad"? 2. Are you considered a default risk? How would a lender evaluate you based on "the five C's" of character, capital, capacity, collateral, and conditions? How could you plan to make yourself more attractive to a lender in the future? 3. Some credit cards offer reward points or 1...

is autonomy good or bad?

what are the two conditions that make bad money drives out good

- Are people born good (and turn bad) or are they born bad (and with time,...

- Are people born good (and turn bad) or are they born bad (and with time, this bad behavior emerges). - Do you obey the speed limit at all times, and if not, under what condition(s) would you make the 'choice' not to. - Discuss the manner in which reward and punishment play a significant role in your choices. If possible, answer in paragraphs

Is home ownership good or bad for an individual? Discuss why or why not. Write two...

Is home ownership good or bad for an individual? Discuss why or why not. Write two to three large paragraphs

An electronics firm manufactures two types of personal computers (PC), a desktop model and a laptop...

An electronics firm manufactures two types of personal computers (PC), a desktop model and a laptop model. The production of a desktop computer requires a capital expenditure of $400 and 40 hours of labor. The production of a laptop computer requires a capital expenditure of $250 and 30 hours of labor. The firm has $20,000 capital and 2,160 labor-hours available for production of desktop and laptop computers. Each desktop computer contributes a profit of $320 and each laptop computer contributes...

Question