advanced microeconomics, uncertainty Question:Suppose that a risk neutral competitive firm has to make its output (y) decisionbefore it observes the uncertain output price, p. Assume that p is a random variablewhose mean is E(p) = 2 and whose variance is Var(p) = 4. Assume that p is alwaysgreater than 1 (this ensures that there is always a strictly positive solution for y,regardless of what p is). Let the cost function be given by C = y + y². How muchis the firm willing to pay for information about p?Use below provided example case to solve above question8.2 Example of Calculation of Value of Information. Consider the choice of output. Let the cost function be C = C(y).• Case 1: choose output before the price is known.• Case 2: choose output after the price is known.• Let C = y².• Case 1:• Case 2:Note: SOC OK.. Calculate profits:• Thus, expected profits are:Note: the second-order condition (SOC) is OK.• Calculate expected profits:• But, remember that:EVPI = E{max(py – C(y)}YThus, using this, we get:EVPI = E{max(py – y²)} – max E(py - y²)YYmax E(py - y²)Ymax uy —YπT (μ)=max py - y²Yπ(p)ܝ ܕ | ܠvar (p)E(p²)==μYр =Y ==P/²/2TIT-max E(py - C(y))Yp²==FOC2yNIE=22E[π(p)] = = E(p²)FOC2y=E(p²) - μ²var(p) + µ²11E[ñ(p)] − ñ(µ) = ½{var(p) + µ²³] — — µ² = ²/var(p) > 0• This is the amount of money the firm is willing to pay for information on p.● It is willing to pay this, although it is risk-neutral.• What about the case of a risk-averse firm?(80)(81)(82)(83)(84)(85)(86)(87)(88)(89)(90)(91)(92)(93)(94)

Cost function : C(y) = y + y2 There are two cases to be considered to find the maximum price that…

Suppose that a risk neutral competitive firm has to make its output (y) decision before it observes the uncertain output price, p. Assume that p is a random variable whose mean is E(p) = 2 and whose variance is Var(p) = 4. Assume that p is always greater than 1 (this ensures that there is always a strictly positive solution for y, regardless of what p is). Let the cost function be given by C = y + y². How much is the firm willing to pay for information about p?

Suppose that a risk neutral competitive firm has to make its output (y) decision before it observes the uncertain output price, p. Assume that p is a random variable whose mean is E(p) = 2 and whose variance is Var(p) = 4. Assume that p is always greater than 1 (this ensures that there is always a strictly positive solution for y, regardless of what p is). Let the cost function be given by C = y + y². How much is the firm willing to pay for information about p?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.7P

See similar textbooks

Similar questions

It is estimated that a grocer’s daily profit from the sale of two brands of cherry juice is given by thefunction:P(x,y) = (x - 30)(70 - 5x + 4y) + (y – 40)(80 + 6x – 7y) centswhere x is the price per can of Brand V Juice and y is the price per can of Brand Triple V Juice. CurrentlyBrand V Juice sells for 50 cents per can and Brand Triple V Juice sells for 52 cents per can.i. Use marginal analysis to estimate the change in the daily profit that will result if the grocer raises theprice of Brand Triple V by one cent per can while keeping the price of Brand V unchanged.ii. Find a stationary point of the daily profit function. Classify this stationary point.
r.edu/courses/97574/quizzes/357143/take ch results - yaz... Question 23 Consider the following probability distribution. xi 0 M Question Mode: M... 1 2 3 O 2.5 0.9 O 1.9 P(X = xi) O 1.5 0.1 The expected value is 0.2 0.4 0.3 Question 24 An analyst has constructed the following probability distribution for firm X's predicted return for upcoming year.
21. The amount of bread (in hundreds of pounds) x that a certain bakery is able to sell in a day is found to be a numerical valued random phenomenon, with a probabiliiy function specified by the p.d.f. f(x), given by : k. x ={k. (10 – x), for 5
Consider a perceptron that has two real- valued inputs and an output unit that uses a Sigmoid function as its output function. All the initial weights and the output unit's threshold equal 0.2 Assume that the output should be 0 for the input in1 = 2 and .in2 = 5 Let (the learning rate) be 0.5 Show the value of the all weights and the .output after 2 iteration the new weights the output is
Which of the following is not a continuous random variable: O The delivery time for a randomly chosen Amazon delivery O The number of whole pizzas cooked by a restaurant in a day O The weight of a randomly chosen car O The height of a randomly chosen student
Profit Analysis Unendo, is a large computer game manufacturer. They have estimated that the demand function for their game "Destiny 3" is as follows... p = 89 - 0.05g DESTIN Y V 3 where p is the price of a game and q is the number of game produced and sold per week. They estimate that their cost function in dollars is ... C(q) = 269 + 5000 where the fixed cost is $5000 and the marginal cost is $26 per game Unendo wishes to maximize the weekly profit of producing and selling the game. Find the number, q, of units that produces maximum profit.
Profit Analysis Unendo, is a large computer game manufacturer. CALL DUTY WWII They have estimated that the demand function for their game "Call of Duty: WWIII" is as follows ... p = 82 - 0.05q; where p is the price of a game and q is the number of game produced and sold per week. They estimate that their cost function in dollars is ... C(q) = 22g + 5000; where the fixed cost is $5000 and the marginal cost is $22 per game Unendo wishes to maximize the weekly profit of producing and selling the game. Find the price, p, per game that generates maximum profit. (Round vour answer to 2. decimal places if necessarv). 8.
The expected value of a random variable X that is denoted by u is called its: O a. median. O b. mode. O c. mean. d. variance. NEXT edu.om/mod/quiz/attempt.php?attempt3D1894613&cmid=8898568ipage=8#
You are at a casino and there are three slot machines you can use to bet on. You must have a return of .5% of higher on what you are betting. Below is the expected returns for each slot machine under various scenarios. What combination of machines do you play to maximize your average return? Decision Variables Data Slot 1 100.0% Monday Tuesday Wednesda Average Slot 2 0.0% Slot #1 8% 4% 5% 5.667% Slot 3 0.0% Slot #2 2% -3% 3% 0.667% Slot #3 6% -2% 4% 2.667% Objective 5.7% Constraints 0.08 >= 0.5% 0.04 >= 0.5% 0.05 >= 0.5% 100.0% .: 100%
PER-UNIT COST (Dollars) Jouet is a profit-maximizing firm producing toy trains-a capital-intensive good-which are sold in its home country, France, and abroad in Russia. Jouet chose foreign production as a method of penetrating the Russian market and has to decide whether it is more efficient to directly invest in ussia to establish a production subsidiary or to license the technology to a Russian firm to produce its goods. n the following graph, AVCR is the average variable cost curve of a Russian firm producing toy trains. (This curve represents costs such as labor nd materials.) The curve ATCsidiary represents the total unit costs Le Jouet will face if it establishes a subsidiary in Russia. ATCudary AVC Russia 15 20 4 60 75 90 105 120 130 150 PRODUCT (Thousands)
Suppose X is a random variable with possible values -2,3 and 1 and with respective probabilities 0.22, 0.35, and 0.43 then the mean and standard deviation of X, respectively, are: of a. 1.04 and 1.838 O b. 1.04 and 1.876 O c. 0.667 and 1.876 d. 1.04 and 0.3733 O e. 0.667 and 0.3733
how to calulate the fixed overhead spending variance?