1)A manager's utility function for profit is U() = 0.5, where is the dollar amount of profit. The manager is considering a risky decision with the four possible profit outcomes shown here. The manager makes the following subjective assessments about the probability of each profit outcome:

Probability Profit Outcome

0.2 -$50,000

0.3 $10,000

0.3 $15,000

0.2 $50,000

The expected utility of profit is $_____. The manager is _____.

Answers:

3,750; risk averse 3,750; risk neutral 7,500; risk neutral 7,500; risk loving

2) Assume a monopoly has the following demand schedule: Price Quantity $30.00 $18,000 $27.50 $20,000 $25.00 $22,225 $22.50 $24,500 $20.00 $27,000 $17.50 $29,000 $15.00 $31,225 For the decrease in price from $22.50 to $20, demand is _____. [Hint: Find TR and MR first].

Answers: elastic inelastic unitary elastic None of the above