3 An investor has a utility function of U(m,s,l)=lª(m-1/2*A*s<)1-a , where A>0 and 0

In the field of economics, the risk aversion is a tendency of a person to avoid the uncertain…

Answered: An investor has a utility function of…

Business

Economics

An investor has a utility function of U(m,s,l)-lª(m-1/2 A s2)1-a, where A>0 and 0

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Q: What are the differences between the two trade theories i.e., comparative advantage and absolute…

A: Global trade has always been an important component of human civilization, and trading concepts have…

Q: Estimated Supply Function: Q = 100 + 20p – 28pf If we hold pf at $0.50 per…

Q: Consider a pure exchange economy with 2 consumers, 1 and 2, who trade financial assets. There are…

A: To find the Walrasian equilibrium firstly we need to find the demand functions for both individuals…

Q: What is the key concern of engineering economics? Corporate taxation is complex. Costs and revenues…

A: Engineering Economics: Engineering economics is a subset of economics; it learned how the principles…

Q: Distinguish between a Piece-Rate and a Time-Rate Compensation System

A: Compensation system includes wages and all other rewards given to workers according to the work they…

Q: Discuss the main unconventional monetary policy tools. Give examples of central bank policies from…

A: The activities done by a central bank or other regulatory body to control the money supply and…

Q: A typical worker will earn £300k in their youth and £600k in middle-age... lifetime, they must…

A: Borrowing refers to the act of obtaining a loan, which is a sum of money that is lent by a…

Q: The SolarFarm powerplant has both fixed and variable costs. As the plant expands production, it…

A: A monopolist is a seller who has no other competitor in the market. He is the only seller in the…

Q: Decision makers in companies should concern themselves with: maximizing the company's value over the…

A: Long-term value created by decisions makers helps to sustain a company for the long duration.

Q: Supply and demand are powerful forces in a free market. In four to five sentences, explain some of…

A: Supply and demand are considered as the two powerful forces of a free market because these are the…

Q: The SolarFarm powerplant has both fixed and variable costs. As the plant expands production, it…

A: A monopoly is a market structure where one producer or seller holds a significant amount of…

Q: For an economist, a technology is: A method of combining resources to make goods and services. A…

A: Input is any resource used in the production of goods and services. For example, Capital, labor,…

Q: Under pressure from the Canadian and U.S. governments in the early 1980s, Japanese automobile…

A: A trade restriction on the quantity of a good that an exporting country is permitted to export to…

Q: 1) What are the key differences between the theory of multinational enterprises and conventional…

A: Trade: The primary theory of economics includes the buying and selling of goods and services with…

Q: 9. The SolarFarm powerplant has both fixed and variable costs. As the plant expands production, it…

A: When there are no other sellers in a market, that person is said to be a monopolist. He is the sole…

Q: On December 30, 1974, the hypothetical country Alpha decided to introduce a minimum wage policy.…

A: The Minimum Wage is meant to prevent employers from paying any employee a wage that is less than the…

Q: Suppose that you are president of the student government, and you have to decide how to allocate a…

A: Scarcity means that available resources and factors of production are limited whereas wants and…

Q: Illustrate, by solving the problem below, the economic order quantity model. Use the information…

A: Economic order quantity refers to an order quantity that is considered optimal for an organization.…

Q: Quikpak sells returnable containers to major food processors. The price received for the containers…

A: In economics, the total cost of each element of production includes the entire opportunity cost…

Q: 1. Does the first welfare theorem apply to the market for oil and gas? Explain your answer in one or…

A: According to the first welfare theorem, which is a cornerstone of economic theory, every…

Q: A. TMK Bank has the following balance sheet (in millions of dollars) with the risk weights in…

A: In economics, Capital Adequacy Ratio (CAR) is the ratio between bank's capital and its risk weighted…

Q: China’s economic transformation since the late 1970s has been a process of neoliberalization,…

A: Economic transformation is the process of altering an economy's composition and functionality. This…

Q: Setting up of institutions and designing of market regulations are often referred to as the general…

A: A government is an organization that holds the power to make and enforce laws and policies in a…

Q: CAN YOU SHOW ME THE STEPS ON HOW TO GRAPH THIS IN EXCEL?

A: The relationship between the quantity of a product that producers want to sell at different prices…

Q: Angela is starting a new business, selling shirts and dresses that she sews herself. The materials…

A: A budget equation defines the combination of various inputs that are being traded by a person for a…

Q: A) Compare world distributions of corn, wheat, and rice production. To what extend to differences…

A: “Since you have posted multiple questions, we will provide the solution only to the first question…

Q: What is the approximate Gini coefficient associated with the following income distributio Household…

A: The Gini coefficient is a calculation of how various groups of households receive differing shares…

Q: What are the benefits of having technology and entrepreneurship in our modern world?

A: Technology and entrepreneurship are closely intertwined, as technology is often the driving force…

Q: The SolarFarm powerplant has both fixed and variable costs. As the plant expands production, it…

A: A seller is referred to as a monopolist if there are no other competitors in the market. He is the…

Q: Calculate summary statistics of monthly returns on INSUR using historical data from January 2016 to…

A: INSUR helps the investors to deal with the market risk associated with their portfolio. It combines…

Q: In a mixed economy, who determines what to produce? Individuals and government Individuals…

A: Concept of Market: In economics, the market theory deals with the system which characterizes the…

Q: True/ False Marginal utility decline with the increase in the unit of consumption of a good.

A: Utility refers to the satisfaction or benefit that a consumer derives from consuming a good or…

Q: Suppose a US medical board is using marginal analysis to determine the optimal screening frequency…

A: Benefits are the usefulness or enjoyment a consumer experiences as a result of using or consuming a…

Q: To say that the demand for labor is a derived demand means that the demand for labor depends upon…

A: Introduction: Similar to all other intermediate or final commodities and services, the labor market…

Q: 1. What is the competitive output? 2. What is the competitive price 3. What is the monopolistic…

A: Perfect competition refers to the market structure characterized by a large number of buyers and…

Q: 4. Sue opens a charge card account with a department store. In the charge account agreement, the…

A: The real yearly cost of borrowing is calculated using the effective interest rate (EIR), commonly…

Q: On December 30, 1974, the hypothetical country Alpha decided to introduce a minimum wage policy.…

A: According to the Roy model, the selection of immigrant workers is determined by the wage…

Q: Nadine Chelesvig has patented her invention. She is offering a potential manufacturer two contracts…

A: The present value of an investment or a project refers to its current value as per its value in the…

Q: Suppose the government regulates the price of a good to be no lower than some minimum level.…

A: Price control refers to the policy of setting prices by a government agency, legislative act, or…

Q: Q3. If the price-demand function per item is p(r) = 75-3; 1 ≤ x ≤ 20 and cost function is C (r) 125+…

Q: Suppose the price elasticity of demand for the market of mobile phones is 0.90. If all…

A: The ratio of a product's percentage change in quantity demanded to its percentage change in price is…

Q: A software firm has only two inputs to production: domestic programmers based in the firm's U.K.…

A: A production function states the mathematical link of quantities of production factor and the…

Q: Define the Role and Coverage of Financial Institutions in providing credit t the Agriculture Sector…

A: A financial institution refers to an organization that provides financial services, such as…

Q: Autarky is the state of self sufficiency. True/False.

A: An extreme kind of economic nationalism and protectionism is what is meant by autarky. Securing the…

Q: Explain the difference between nominal and real wages..

Q: 1.14. Consider a variation on the idea of a weighted voting system, in which one or more voters is…

A: In economics, the term "voting" refers to the process through which individuals or organizations…

Q: Consider the balance sheet for the DI listed below Assets Cash Securities Loans Total assets…

A: Asset Amount Liability and Equity Amount Cash 5 Deposits 68 Securities 20 Equity 7 Loans 50…

Q: 1. ‘China’s economic transformation since the late 1970s has been a process of neoliberalization,…

A: Economic transformation refers to the process of changing the structure and performance of an…

Q: SHORT RUN PRODUCTION Short run Production In the short run, firms can for a time increase its output…

A: Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: P P₁ P₂ Pr NO Po Market for Good X Q₁ Q₂ S D Q Refer to the Market for Good X above. Po-$5, P₁-$35,…

A: Price floor: Price floor is a govt-imposed price control. When the govt decides that the market…

Question

An investor has a utility function of U(m,s,l)=lª(m-1/2*A*s<)1-a , where A>0 and 0<a<1 are preference parameters. m and s represent the expected return and standard deviation of the investor's complete portfolio, respectively. The investor
can invest in a risk-free bond with the return of Rf, in a risky security with the expected return of E[RM] and the standard deviation of sM, and in a non-interest-paying liquid security (such as cash). I refers to the weight of the liquid security
inside the investor's portfolio. Assume it is possible to short any security apart from the liquid security. Which of the following statements about this investor's optimal portfolio is the most inaccurate?
As a increases, she invests a larger fraction of her wealth in the liquid asset.
O a.
All of the statements are accurate.
Ob.
The fraction of wealth invested in the risky asset decreases as a increases.
O c.
As E[RM] increases, she invests a larger fraction of her wealth in the liquid asset.
d.
A more risk averse investor (higher A) invests less in the liquid asset.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step 3

VIEW

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

Suppose you have an exponential utility function given by U(x) =1- exp(-x/R) where, for you, R = 1000. Further, suppose you have an investment with a 50/50 chance of returning either 0 or 2000 dollars. Note U(0) = 0 and U(2000) = 0.865, so the utility of the lottery is 0.432. What is the certain equivalent of that investment?
V*(p1, p2, 1) = True False P₁ P₂ 1² is a valid indirect utility function.
6. Are the following utility functions consistent with the axioms of the expected utility theorem? Everything is in monetary terms. (a) u(x) = = -x. (b) u(x) = x² for a E (-10, 10]. (c) u(x) = 5. %3D
Problem 1 Jane has the following utility function: u(w) w^.5 or the square root. function Which of the following prospects would she prefer? P1(.4, 3,000, 600) P2(.7, 1,200, 1,000) P3(.6, 2,000, 100)
Assume that someone has inherited 2,000 bottles of wine from a rich uncle. He or she intends to drink these bottles over the next 40 years. Suppose that this person’s utility function for wine is given by u(c(t)) = (c(t))0.5, where c(t) is each instant t consumption of bottles. Assume also this person discounts future consumption at the rate δ = 0.05. Hence this person’s goal is to maximize 0ʃ40 e–0.05tu(c(t))dt = 0ʃ40 e–0.05t(c(t))0.5dt. Let x(t) represent the number of bottle of wine remaining at time t, constrained by x(0) = 2,000, x(40) = 0 and dx(t)/dt = – c(t): the stock of remaining bottles at each instant t is decreased by the consumption of bottles at instant t. The current value Hamiltonian expression yields: H = e–0.05t(c(t))0.5 + λ(– c(t)) + x(t)(dλ/dt). This person’s wine consumption decreases at a continuous rate of ??? percent per year. The number of bottles being consumed in the 30th year is approximately ???
INV 1 5aiv Suppose that you have the following utility function: U=E(r) – ½ Aσ2 and A=3 Suppose that you have $10 million to invest for one year and you want to invest that money into ETFs tracking the S&P 500 (US) and S&P/TSX 60 (Canada) index, which are often used as proxies for the US and Canadian stock markets, respectively, and the Canadian one-year T-bill. Assume that the interest rate of the one-year T-bill is 0.35% per annum. You have found two ETFs that you are interested in. From a set of their historical data between 2001 and 2019, you have estimated the annual expected returns, standard deviations, and covariance as follows: ETFUS : E(r)= 0.070584 standard deviation = 0.173687 ETFCDA : E(r)= 0.073763 standard deviation = 0.16816 Covariance between ETFUS and ETFCDA = 0.02397 What is the standard deviation for ETFCDA?
a) (3) Consider two investments X and Y, where X pays $0 and $10 with equal probability and Y pays 0 with probability 0.75 and $20 with probability 0.25. What investment would an investor choose if her utility function is u(x) = x? u(x) = x u(x) = 1-e 10 () (i) (ii)
A consumer is maximising her utility function: U(r. y) = (r05 +y0.5)2, subject to the budget constraint 4x + 2y = 108. (a) Set up the Lagrangian function of this utility maximisation problem and first-order conditions. (b) What are the utility maximizing amounts of x and y? Also, calculate the multiplier. (c) What are the utility maximising amounts of x and y if the budget constrain to x+ 2y = 36? How would change? Explain your reasoning. (Hint: Yc need to calculate A, rather comment on how it would change and why.)
Suppose your utility function for money is a square-root function of its value in US dollars. So, for instance, $400 is worth 20 utils for you, $961 is worth 31 utils for you, and $62.5K is worth 250 utils for you. Now, let’s say your annual salary is $90K, although there is a small risk (p = 0.05) that something catastrophic will happen and reduce your income for the year to $14.4K. An insurance company comes along and offers to insure you against the loss of your salary. The cost of the insurance is $4,736. If you buy the policy and catastrophe strikes, the insurance company will pay out the $75,600 that you would otherwise have lost. From the standpoint of maximizing expected utility, would buying this insurance be a good deal for you? What would be the insurance company’s expected monetary value of selling you the policy?
Q2: Consider a person who is thinking about whether to engage in a life of crime. He knows that, if he gets caught, he will be in jail and his consumption will be low, xº, but if he does not get caught, he will be able to consume an amount x₁ that is considerably above Χρ· (a) Suppose that x₁ = 20; x₁ = 80 (where both are expressed in thousands of pounds) and suppose the probability of getting caught is 8 = 0.5. What is the expected consumption level if the life of crime is chosen? (b) Suppose the potential criminal's tastes over gambles can be expressed using the following utility function u(x) = In (x). Calculate the person's expected utility from a life of crime. How does it compare with the utility of the expected value of consumption? Based on your answer, explain this individual's attitude towards risk and draw the consumption/utility relationship. (c) Consider the level of consumption this person could attain by not engaging in a life of crime. What level of consumption from an…
Suppose a household has the following lifetime utility function: U=c1/2 + ẞc¹/2 12tt+1 A) Find expressions for the partial derivatives of lifetime utility, U, with respect to period t and period t + 1 consumption. Is marginal utility of consumption in both periods always positive? B) Find expressions for the second derivatives of lifetime utility with respect to period t and t+1 consumption, i.e., 2U and a 20_Are these second derivatives always negative for ac²²+1 any positive values of period t and t+1 consumption? C) Derive an expression for the indifference curve associated with lifetime utility level Uo (i.e., derive an expression for C++₁ as a function of U₁ and c). What is the slope of the indifference curve? How does the magnitude of the slope vary with the value of c?
Consider a consumer who can borrow or lend freely at an interest rate of 100% per period of time (think of the period as being, say, 30 years, a bit like with a mortgage). So r = 1.0, or 100%. The consumer's two-period utility function is: U = In(ct) + (1/2)In(Ct+1) The consumer earn Y=100 each period, so Y₁=100 and Yt+1 also equals 100. If this consumer is behaving optimally, trying to maximize her lifetime utility subject to the IBC, what's her consumption in period t?