Q1. An individual wants to start a business at which he expects to make 50,000$. Getting a license for the business costs 35,000$. The chance of getting caught without a license is 1/10, in which case he gets a fine of 50,000 $. Would he get a license if he is risk averse with utility U(x) = √x? What happens if the probability of getting caught increases to ½? Can you propose an alternative to increasing law enforcement?
Q2. As the sales manager of an appliance store, you sometimes visit outlets run by your competitors. Six months ago you noticed that their prices were very close to yours. Yesterday, you observed that their price have decreased and yours have not. Nevertheless your total unit sales have increased over this period. Assuming rational buyers and no deceptive advertising, how can you account for this?