Demand

Practice Problems

Problem 4.1: Company A and Company B are both selling stock at $1 a share. If risk-neutral Kenny wants to buy stock in either Company A or Company B, and he thinks that the possible future values for Company A's stock are $0, $1, $5, and $20, with respective probabilities of 20%, 50%, 20%, and 10%, and that the possible future values of B's stock are $0, $1, $10, and $100, with respective probabilities of 50%, 30%, 15%, and 5%, which stock will he pick? [Solution]

Problem 4.2: Which of the following are high risk investments, and which are low risk?

Gold
Stocks in new companies
IRA's
Savings bonds
Lottery tickets [Solution]

Problem 4.3: What is the expected value of a stock whose possible future values are $0, $1, $10, and $60 with respective probabilities of 25%, 50%, 20%, and 5%? [Solution]

Problem 4.4: If the current price of a stock is $7 a share, will risk-neutral Andy buy any stock if he believes that the possible future values are $0, $2, $5, $10, and $50, with respective probabilities of 10%, 15%, 50%, 20%, and 5%? [Solution]

Problem 4.5: What is the maximum price that risk-neutral Tamara will be willing to pay for a stock which she believes has possible future values of $0, $5, $10, and $200, with respective probabilities of 50%, 25%, 24%, and 1%? [Solution]

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Consumer Behavior in Uncertain Situations