Name Key

1. 

You are buying a new car.  You know that researching car prices on the internet will lower the price you pay for the car.  The price you will pay with various levels of internet search time are given in the table below.  If you can earn $100 per hour working instead of searching for information on cars, what is your optimal number of hours spent conducting internet research on cars?

 Hours of research =

    Hours Searching                   Price of Car__     

                        0                                  23,000

                        1                                  22,000

                        2                                  21,500

3                                                         21,000

4                                                         20,800

5                                                         20,750

      _____________________________________

2.    

You have decided to sell your own home.  On the first day, you receive an offer for $150,000.  If you decline the offer and keep the house on the market for 30 days, there is a 60% chance you will receive an offer for $250,000 (your asking price) and a 40% chance you will receive no offer. Alternatively, you can hire a real estate agent  and have a 90% chance of selling your house for $250,000 in 30 days and a 10% chance of receiving no offer. If you receive an offer of $250,000 then you must pay the real estate agent a commission of $12,500. If no offer is forthcoming within the 30 days then you don't have to pay a commission.  To wait 30 days to sell the house costs you $5000 in lost income because you cannot move to start your new job.

  a. What is the expected value of keeping the home on the market for thirty days without hiring a real estate agent?   =.6(250000) + .4(0) - 5000 = $145000

b. What is the expected value of hiring a real estate to sell your home for you? =.9(250000 - 12500) + .1(0) - 5000 = $208750

c.  At this juncture should you 

Accept the offer

Keep the house on the market yourself

Hire the real estate agent

  3.  You are hiring a manager for your firm for one year.  You have three job candidates with different levels of education who, if they work out, will do the job equally well.  You can hire the high school graduate for $25,000, with a 25% chance of it working out. You can hire the "C" average college graduate for $30,000, with a 50% chance of it working out.  You can hire the "A" average college graduate for $33,000, with a 95% chance of it working out. If the manager you hire does not work out, it will cost you $7500 to run a new hiring search. 

a. What is the expected value of hiring the high school grad? 25000+5625=30625

b. What is the expected value of hiring the "C" average college grad? 30000+.5(7500) = 33750

c. What is the expected value of hiring the "A" average college grad? 33000+.05(7500) = 33375

d. Which candidate do you choose?
  High school grad
  "C" average college grad
  "A" average college grad