1. Suppose an investment has three possible outcomes. There is a 50% chance that it brings a profit of 4,000,000. There is a 40% chance that it brings a profit of 1,000,000. There is a 10% chance that is brings a profit of 0. What is the expected profit (or expected value of the profit) for this investment?
2. Continue to suppose an investment has three possible outcomes. There is a 50% chance that it brings a profit of 4,000,000. There is a 40% chance that it brings a profit of 1,000,000. There is a 10% chance that is brings a profit of 0. Suppose a decision makers utility function can be described by U(w)=w^0.5. What is the expected utility of this investment?
3. Continue to suppose an investment has three possible outcomes. There is a 50% chance that it brings a profit of 4,000,000. There is a 40% chance that it brings a profit of 1,000,000. There is a 10% chance that is brings a profit of 0. Suppose a decision makers utility function can be described by U(w)=w^0.5. What is this investment's certainty equivalence for this decision maker?
4. A firm that hosts auctions for art gives the following instructions for bidding: ``To place a bid in the saleroom, raise your paddle until the Auctioneer acknowledges you. The auctioneer increases the bids by increments that usually do not exceed ten percent of the previous bid. When a sole bidder remains, the Auctioneer brings down the hammer and declares the lot sold [for the amount of the highest bid].'' Based on that description, what type of auction does the auction house run?