27. Mr. X has an exogenous income W and his utility from consumption c is u(c). Mr. X knows that an accident can occur with probability p and if it occurs, the monetary equivalent to the damage is T. Mr. X can however affect the accident probability p through the prevention effort e. In particular, e can take two values - zero and a and an assumption is that p(0) > p(a), that is by putting prevention effort, probability of occurring an accident can be reduced. Let us also assume that if Mr. X puts an effòrt e, the disutility from the effort is Ae2 where A is the per unit effort cost. What iş the critical value of A, A*, below which the effort will be undertaken, and above which the effort will not be undertaken, by Mr. X ? (a) A* = P(@)-p(0)|[u(W-T)-u(W)] a2 (b) A* = p(a)-p(0)]a? [u(W-T)-u(W)| %3D p(a) 4 p(0) (W-T) 4(W) (с) A* (d) A*: p(a)p(0)a² u(W-T)u(W) ||

27. Mr. X has an exogenous income W and his utility from consumption c is u(c). Mr. X knows that an accident can occur with probability p and if it occurs, the monetary equivalent to the damage is T. Mr. X can however affect the accident probability p through the prevention effort e. In particular, e can take two values - zero and a and an assumption is that p(0) > p(a), that is by putting prevention effort, probability of occurring an accident can be reduced. Let us also assume that if Mr. X puts an effòrt e, the disutility from the effort is Ae2 where A is the per unit effort cost. What iş the critical value of A, A, below which the effort will be undertaken, and above which the effort will not be undertaken, by Mr. X ? (a) A = P(@)-p(0)|[u(W-T)-u(W)] a2 (b) A* = p(a)-p(0)]a? [u(W-T)-u(W)| %3D p(a) 4 p(0) (W-T) 4(W) (с) A* (d) A*: p(a)p(0)a² u(W-T)u(W) ||

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.5P

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