3. A risk-neutral principal hires an agent to work on a project at wage w. The agent's utility function is: v(w) – g(e), where v(w) = √w and g(e)=e/ 2 The agent can choose one of two possible effort levels, e₁ = 4 or e₂ = 6. If the agent chooses effort level e₁ = 4 the project yields 100 with probability 1/4 and 0 with probability 3/4. If he chooses e₂ = 6 the project yields 100 with probability%2 and 0 with probability %. The reservation utility of the agent is 0. (a) Suppose the effort level chosen by the agent is observable by the principal. Find the contract chosen by the principal. Show graphically in terms of contingent utilities v(w₁00) and v(wo)
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- Cost-Benefit Analysis Suppose you can take one of two summer jobs. In the first job as a flight attendant, with a salary of $5,000, you estimate the probability you will die is 1 in 40,000. Alternatively, you could drive a truck transporting hazardous materials, which pays $12,000 and for which the probability of death is 1 in 10,000. Suppose that you're indifferent between the two jobs except for the pay and the chance of death. If you choose the job as a flight attendant, what does this say about the value you place on your life?To go from Location 1 to Location 2, you can either take a car or take transit. Your utility function is: U= -1Xminutes -5Xdollars +0.13Xcar (i.e. 0.13 is the car constant) Car= 15 minutes and $8 Transit= 40 minutes and $4 What is your probability of taking transit given the conditions above? What is your probability of taking transit if the number of buses on the route were doubled, meaning the headways are halved? Remember to include units.1. Now, imagine that Port Chester decides to crack down on motorists who park illegally by increasing the number of officers issuing parking tickets (thus, raising the probability of a ticket). If the cost of a ticket is $100, and the opportunity cost for the average driver of searching for parking is $12, which of the following probabilities would make the average person stop parking illegally? Assume that people will not park illegally if the expected value of doing so is negative. Check all that apply. A. 9% B. 18% C. 17% D. 10% 2. Alternatively, the city could hold the number of officers constant and discourage parking violations by raising the fine for illegal parking. Suppose the average probability of getting caught for parking illegally is currently 10% citywide, and the average opportunity cost of parking is, again, $12. The fine that would make the average person indifferent between searching for parking and parking illegally is ____ , assuming that people will not…
- You and a coworker are assigned a team project on which your likelihood or a promotion will be decidedon. It is now the night before the project is due and neither has yet to start it. You both want toreceive a promotion next year, but you both also want to go to your company’s holiday party that night.Each of you wants to maximize his or her own happiness (likelihood of a promotion and mingling withyour colleagues “on the company’s dime”). If you both work, you deliver an outstanding presentation.If you both go to the party, your presentation is mediocre. If one parties and the other works, yourpresentation is above average. Partying increases happiness by 25 units. Working on the project addszero units to happiness. Happiness is also affected by your chance of a promotion, which is depends on howgood your project is. An outstanding presentation gives 40 units of happiness to each of you; an aboveaverage presentation gives 30 units of happiness; a mediocre presentation gives 10 units…Your utility function is given by M1/2. You have $100 and are planning to invest in a venture where you can win or lose 50 with equal probability. Will you accept the venture? What is the minimum gain you need to make in the good scenario such that you will invest in the venture?A person has wealth of $500,000. In case of a flood her wealth will be reduced to $50,000. The probability of flooding is 1/10. The person can buy flood insurance at a cost of $0.10 for each $1 worth of coverage. Suppose that the satisfaction she derives from c dollars of wealth (or consumption) is given by u(c) = √c. Let C denote the contingent commodity dollars if there is a flood (horizontal axis) and CNF denote the contingent commodity dollars if there is no flood (vertical axis). 1 Determine the contingent consumption plan if she does not buy insurance. 2 Assume that the person has von Neumann-Morgenstern utility function on the contingent consumption plans. Write down the expected utility U(CF, CNF) and derive the MRS. 3 Solve for optimal (CF, CNF). To this end, first use the tangency condition (TC) to find the relation between the two contingent commodities (CF, CNF). Next, use (BC) to solve for their values. What is the optimal amount of insurance K the person will buy? (Note:…
- Hello can any one help with this Economics question: A contractor spends Dollar 3,000 to prepare for a bid on a construction project which, after deducting manufacturing expenses and the cost of bidding, will yield a profit of dollar 25,000 if the bid is won. If the chance of winning the bid is ten per cent, compute his expected profit and state the likely decision on whether to bid or not to bid?When the second order derivative of a function is greater than zero than the agent is risk lover. question; Asses the risk attitude of an agent represented by the expected utility function u(x)= 2x2-5. However my course material writes that this agent is risk neutral because it is affine. My question is that whys is this so despite the fact that the second order derivative is '4' which is >0. Kindly explain this to me with complete steps.Alice would be willing to pay up to £15 for a gamble giving a 35% chance of £50 and a 65% chance of £10. (a) What is the expected value of this gamble? Represent Alice's preference over risk in a large, suitably labelled graph. The graph should include Alice's expected utility from the gamble described above (b) Represent on the same graph the maximum amount that Alice would pay to remove the risk from this gamble.
- 3. The utility function is u(x, y) = √x+y. Suppose that 1) with probability 0.5, (I, Px, Py) (8, 2, 2) and 2) with probability 0.5, (I, Px, Py) = (8, 4, 8). Explain graphically whether an increase in x increases or decreases the riskiness of the utility gamble. U 6 5 4 3 2 1 0 0 0.25 0.5 0.75 1 1 1.25 1.5 1.75 28John is a farmer with $225 of wealth. He can either plant corn or beans. If he plants corn, John earns an income of $675 if the weather is GOOD and $0 if the weather is BAD. If he plants beans, John earns an income of $451 under both GOOD and BAD weather. The probability of GOOD weather is 0.7. The probability of BAD weather is 0.3. John's utility function is u(C) = 5VC , where C is the value of consumption. Use this information to fill out the table below. (Don't forget to include the value of wealth when you compute consumption!). The PDF will round all typed numbers to two decimals; However, you should use all decimals when computing your answers. %3D Plant Corn Plant Beans Expected value of consumption Expected value of utility Certainty Equivalent Risk Premium 9. What type of risk preferences does John have? Mae owns an insurance company in a nearby town and has decided to offer conventional crop insurance to corn farmers in the area. Assume that Mae has perfect information and…You are considering two options for your next family vacation. You can visit Disney World or Chicago. Your utility from Disney World is 100 if the weather is clear, and 0 if it rains. Chicago is worth a utility of 70 if the weather is clear and a utility of 40 if the weather is rainy. Also assume that the chance of rain at Disney World is going to be 50% and the chance of rain in Chicago is 40%. As a utility maximizer, should you plan to go to Disney World or Chicago? (Explain using relevant equations)