You have $200 and are thinking about betting on the Big Game next Saturday. Your team, the Golden Boars, are scheduled to play their traditional rivals the Robber Barons. It appears that the going odds are 2 to 1 against the Golden Boars. That is to say if you want to bet $10 on the Boars, you can find someone

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You have $200 and are thinking about betting on the Big Game next Saturday. Your team, the Golden Boars, are scheduled to play their traditional rivals the Robber Barons. It appears that the going odds are 2 to 1 against the Golden Boars. That is to say if you want to bet $10 on the Boars, you can find someone who will agree to pay you $20 if the Boars win in return for your promise to pay him $10 if the Robber Barons win. Similarly if you want to bet $10 on the Robber Barons, you can find someone who will pay you $10 if the Robber Barons win, in return for your promise to pay him $20 if the Robber Barons lose. Suppose that you are able to make as large a bet as you like, either on the Boars or on the Robber Barons so long as your gambling losses do not exceed $200. (To avoid tedium, let us ignore the possibility of ties.)
(a) If you do not bet at all, you will have $200 whether or not the Boars win. If you bet $50 on the Boars, then after all gambling obligations are settled, you will have a total of 300 dollars if the Boars win and 150 dollars if they lose. On the graph below, use blue ink to draw a line that represents all of the combinations of “money if the Boars win” and “money if the Robber Barons win” that you could have by betting from your initial $200 at these odds.
(b) Label the point on this graph where you would be if you did not bet at all with an E.
(c) After careful thought you decide to bet $50 on the Boars. Label the point you have chosen on the graph with a C. Suppose that after you have made this bet, it is announced that the star Robber Baron quarterback suffered a sprained thumb during a tough economics midterm examination and will miss the game. The market odds shift from 2 to 1 against the Boars to “even money” or 1 to 1. That is, you can now bet on either team and the amount you would win if you bet on the winning team is the same as the amount that you would lose if you bet on the losing team. You cannot cancel your original bet, but you can make new bets at the new odds. Suppose that you keep your first bet, but you now also bet $50 on the Robber Barons at the new odds. If the Boars win, then after you collect your winnings from one bet and your losses from the other, how much money will you have left______. If the Robber Barons win, how much money will you have left after collecting your winnings and paying off your losses? _______.
(d) Use red ink to draw a line on the diagram you made above, showing the combinations of “money if the Boars win” and “money if the Robber Barons win” that you could arrange for yourself by adding possible bets at the new odds to the bet you made before the news of the quarterback’s misfortune. On this graph, label the point D that you reached by making the two bets discussed above.
Related Book For answer-question

Intermediate Microeconomics

9th edition

Authors: Hal R. Varian

ISBN: 978-0393123968