All exercises are available on MyEconLab; =answer [&\*|=|answer&] at the back of this book.

1. Assessing Risk

  1. 1.1 Mme. Giselle’s boutique in Cleveland, Ohio, is planning to sell Parisian frocks. If the public view them as being the latest style, the frocks will be worth $10,000. However, if the public view them as passé, they will be worth only $2,000. If the probability that they are stylish is 20%, what is the expected value of the frocks?

  2. *1.2 Asa buys a painting. He believes that the artist will become famous and the painting will be worth $1,000 with a 20% probability, the painting will be destroyed by fire or some other disaster with a 10% probability, and otherwise the painting will be worth $500. What is the expected ...

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