1) Explain the relationship between risk aversion, internal interest rates, and the prices that people with different risk aversions would be willing to pay for the same stock.
2) Suppose you're in the market for a new sedan. If the car is a "lemon", it will be worth $15,000. If the car is a "peach", it will be worth $25,000.
a. If you think half the sedans on the lot are "lemons", what should you be willing to pay for a new sedan?
b. If you think 60% of the sedans on the lot are "lemons", what should you be willing to pay for a new sedan?
c. If you think 80% of the sedans on the lot are "lemons", what should you be willing to pay for a new sedan?