Exercises

Assignment 4 Chapter 7, 9

1.
7.1 (1p)
Which interpretations of probability are these statements based upon?
(a) The probability of 8 or more pips being shown when you throw two dice
is 5/12.
(b) Politician: The chances of a victory for Labor at the next election are 55%.
(c) Soccer player: Next season, my team will be promoted to the Bundesliga
for sure.
(d) The probability of a child being a boy is 100/206.
(e) The probability of an accident is higher on regular highways than it is on
the autobahn.
2.
7.4 (1p)
An estimate is needed for the number of jobs that are created in a region through
the construction of a technology park. The project team in charge works out the
following parameters of the probability distribution:
- At least 100 jobs are created.
- The 20% point is at 130, the 40% point is at 150, the 60% point is at 165,
the 80% point is at 220 jobs.
- The maximum that seems possible is 400 jobs.
(a) Draw the distribution function by combining the mentioned points
linearly.
(b) What is the probability of creating more than 200 new jobs?
(c) What is the probability of creating between 150 and 180 jobs?

BSM HT2016
3.
9.4 (2p)
Jack accidentally damages Utes vase which is of high but hard to estimate value.
In order to settle the claim, Klauss insurance makes Ute an offer of 10,000. Ute
considers whether to accept the offer or to ask a lawyer to file a claim for
50,000.
Ute assumes that the insurance will react by offering 25,000 or repeating the
offer of 10,000; she thinks both alternatives are equally likely. Ute would accept
25,000 if it were offered. If the offer of 10,000 is repeated she would have the
choice of accepting it or taking legal action, again with an uncertain result. She
thinks that the outcomes of10,000, 25,000 and 50,000 are equally likely.
I. Depict the decision problem in a decision tree.
2. Show three strategies from which Ute can choose.
3. Which strategy would Ute pick if she had the following utility function:
$
= .
%&,&&&

9.5 (2p)
4.

A decision-maker has constant relative risk aversion. His certainty equivalent for
the lottery (100, 0.5; 20, 0.5) is equal to 50. State a utility function which is
in line with this for the interval [20;100] and normalize the values to lie
between 0 and 1.