Suppose that my utility function is u(w) = w0.8. (a) If I played one round of the St. Petersburg Lottery, would would my expected utility be? Assume I currently have zero wealth, and round your answer to two decimals places. Note that in order to compute my expected utility, you will need to sum a geometric series. Expected Utility = utiles. (b) Use your rounded answer from (a) to determine my certainty equivalent for the St. Petersburg Lottery. Round your answer to the nearest cent. Certainty Equivalent = $
Q: Vanessa has a utility function for income given by U(I) = VI (that is the square root of income).…
A: The concept of expected utility in economics is an important concept as it helps the rational…
Q: In a final round of a MegaMillion TV show a contestant has a won $1 million and has a chance of…
A: Cost of play=$1 million Winning cost=$2 million
Q: Five of ten people earn $0, four earn $100, and one loses $100. What is the expected payoff? What is…
A: An average is the sum of the earnings divided by the number of observations. In this case, ten…
Q: Calculate the expected utility of John when he faces the risky prospect X = {1, 2, 3, 4; 0.2, 0.4,…
A: Calculate the expected utility of John when he faces the risky prospect X = {1, 2, 3, 4; 0.2, 0.4,…
Q: Jamal has a utility function U = W1/2, where W is his wealth in millions of dollars and U is the…
A: Answers. Part - 1 By dividing the utility gained from each conceivable outcome by the corresponding…
Q: Calculate the manager's risk premium for the prospect P and use it to explain whether or not he will…
A:
Q: Assume that you will earn $90,000 next year. The probability of having an accident in a year is 0.05…
A: Expected Utility refers to an economic term summarizing the utility that an organization or…
Q: Consider a consumer who is deciding to buy insurance for his beachfront house. Suppose the…
A:
Q: Arielle is a risk-averse traveler who is planning a trip to Canada. She is planning on carrying $400…
A: Maximum a risk - averse person is willing to pay for traveler's check is the amount which makes…
Q: As risk aversion increases, which direction does the certainty equivalent wealth move, holding the…
A: The certainty equivalent can be used by a business looking for investors to calculate how much more…
Q: James, whose Bernoulli utility function is given by u(w) = w0.5, participates in a lottery which…
A: Certainty equivalent is the certain sum of money that makes an individual indifferent between…
Q: Define the risk premium p = č - Cce where č level of consumption from the lottery (7 = E[c]).…
A: Risk premium is the amount which a consumer is willing to pay in order to avoid a risky event . RP…
Q: A consumer's preferences over gambles is represented by the expected utility function U (W,, W2, 1 –…
A: utility function is an important concept that measures preferences over a set of goods and services.…
Q: Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess and Lex both…
A: Hi Student, thanks for posting the question. As per the guidelines I can answer the first question.…
Q: Please answer true or false for each of the following statements. A risk-averse consumer has…
A: In a market, an individual will be risk-averse when he chooses tan investment with less returns and…
Q: Suppose that Mira has a utility function given by U=2I+10√I. She is considering two job…
A: Given; Mira has a utility function; U=2I+10I For first job:- Salary=$40000 for sure For Second job:-…
Q: Consider two investors A and B.If the Certainty-Equivalent end-of-period wealth of A is less than…
A: The tendency of a person to choose with low uncertainty to those with high uncertainty even if the…
Q: Studies have concluded that a college degree is a very good investment. Suppose that a college…
A: Earning of high school graduate = 1070000 $ Earnings of college graduate = 79 % more than earning of…
Q: Suppose that there is limited commitment in the credit market, but lenders are uncertain about the…
A: The credit market, also known as the debt market, is where businesses and governments sell debt to…
Q: Wilfred's expected utility function is pä0.5 + (1 − p)x2.5, where p is the probability that he…
A: Utility function can be defined as the measure for a group of goods and services preferred by…
Q: An employer has hired Freddy and the current compensation contract gives Freddy $6,600 with prob.…
A: Expected value is the sum of multiplication of value with respective probability. Expected value =…
Q: Studies have concluded that a college degree is a very good investment. Suppose that a college…
A: The (Expected value) EV is an EV for investment at the serval point in the next year). In-Stat.…
Q: Assume that the probability of having an accident in a year is 0.08. Suppose that your yearly income…
A: Expected Utility refers to an economic term summarizing the utility that an organization or…
Q: Marco's utility function is U =: where I is income. An investment opportunity where there is a 30%…
A: Given, 30 % change in earnings = $200 35% change in earnings = $500 35% change in earning = $2000…
Q: An investor is considering three strategies for a $1,000 investment. The probable returns are…
A:
Q: Now, imagine that Port Chester decides to crack down on motorists who park illegally by increasing…
A: Microeconomics is that the study of people's and enterprises' resource allocation selections and…
Q: Burger Prince Restaurant is considering the purchase of a $100,000 fire insurance policy. The fire…
A: If Burger Prince restaurant wants to buy fire policy at neutral risk, then they have to pay the…
Q: Exercise 3: Risky Investment Charlie has von Neumann-Morgenstern utility function u(x) = ln x and…
A: The joy or pleasure that customers get from intense a trade goods or service is remarked as utility.…
Q: For the utility function U = Wa, what values of “a” correspond to being risk averse, risk neutral,…
A: The utility function of a risk averse individual is concave The utility function of a risk neutral…
Q: Scenario 2 Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess…
A: Given that, all income of both of them spent on consumption (c) Yearly income of Lex =…
Q: Max Pentridge is thinking of starting a pinball palace near a large Melbourne university. His…
A: The measure that depicts the satisfaction that is being gained by an individual from the consumption…
Q: People in a certain group have a 0.75% chance of dying this year. If a person in this group buys a…
A:
Q: Suppose a company is offering insurance where your premium is $500 and your payout is $2000. What…
A: We are going to get the payout with probability 0.2 but we have to pay premium in both the states.
Q: Let W0 represents an individual’s current wealth and U(W) is this individual’s von…
A: Utility analysis is a quantitative method which in turn estimates the dollar value of benefits being…
Q: Indicate whether the statement is true or false, and justify your answer.A typical value function is…
A: False, because a typical value function has both the concave and convex parts.
Q: Consider an individual who maximizes his expected utility with the following utility function: U(x)…
A: Expected value is the product of weighted average where the weights are the probabilities and the…
Q: You participate in a coin-toss gamble with a weighted coin. The coin has a 70% chance of landing…
A: Expected utility refers to the aggregate economy utility due to which individuals can make…
Q: Nick is risk averse and faces a financial loss of $40 with probability 0.1. If nothing happens, his…
A: Since you have asked multiple questions, we will solve the first question for you. If you want any…
Q: Question 23 Select ALL that is TRUE. You may select more than one. OUtility function of a risk…
A: In a market, utility is an economic concept that is used to explain the consumer behavior and their…
Q: Consider the following prospects – A: (0.5, 0, 0.5: $100, $60, $10) B: (0, 0.9, 0.1: $100, $60,…
A: In economic science, the expected utility hypothesis could be a well-known concept that is a guide…
Q: Charlie has von Neumann-Morgenstern utility function u(x) = ln x and has wealth W = 250, 000.…
A: von Neumann-Morgenstern utility function, an augmentation of the hypothesis of purchaser…
Q: Explain why the variance of an investment is a useful measure of the risk associated with it
A: please find the answer below.
Q: Suppose your utility function for money is a square-root function of its value in US dollars. So,…
A: Given, Annual salary = $90,000 Annual salary (catastrophic) = $14,400 Cost of insureance = $4,736…
Q: Consider the following prospects: A: (0.5, 0, 0.5: $100, $60, $10) B: (0, 0.9, 0.1: $100, $60, $10)…
A:
Q: Show that an investor with a quadratic utility function ranks portfolios only on the basis of the…
A: Utility is a measure of relative satisfaction that an investor derives from totally different…
Q: Risky Prospect K is defined as: K = ($5, 0.30 ; $11,0.70) If my utility of wealth function is given…
A: Computation of expected utility of the prospect :- Expected utility = (0.30 x 5^0.6) + (0.70 x…
Q: Max Pentridge is thinking of starting a pinball palace near a large Melbourne university. His…
A: Given that, His utility is u(W) = 1 - (5,000/W), where W is his wealth.
Step by step
Solved in 2 steps
- Suppose that my utility function is u(w) = wº.1 (a) If I played one round of the St. Petersburg Lottery, would would my expected utility be? Assume I currently have zero wealth, and round your answer to two decimals places. Note that in order to compute my expected utility, you will need to sum a geometric series. Expected Utility = 2.15 utiles. (b) Use your rounded answer from (a) to determine my certainty equivalent for the St. Petersburg Lottery. Round your answer to the nearest cent. Certainty Equivalent = $ 2110.50Suppose 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?Suppose that Mike, with utility function, u(x) = v x+5000, is offered a gamble where a coin is flipped twice, and if the coin comes up heads both times (probability - .25), he gets $40,000. Would he prefer this gamble or $7,500 for sure? What is his Certainty Equivalent?
- 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?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 CF 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). (a) Determine the contingent consumption plan if she does not buy insurance. (b) Determine the contingent consumption plan if she buys insurance $K. (c) Use your answer in (b) to eliminate K and construct the budget constraint (BC) that gives the feasible contingent consumption plans for different amounts of insurance K. Determine the slope of budget line (both graphically and by forming the price ratio).Asap
- A woman with current wealth X has the opportunity to bet an amount on the occurrence of an event that she knows will occur with probability P. If she wagers W, she will received 2W, if the event occur and if it does not. Assume that the Bernoulli utility function takes the form u(x) = with r > 0. How much should she wager? Does her utility function exhibit CARA, DARA, IARA? Alex plays football for a local club in Kumasi. If he does not suffer any injury by the end of the season, he will get a professional contract with Kotoko, which is worth $10,000. If he is injured though, he will get a contract as a fitness coach worth $100. The probability of the injury is 10%. Describe the lottery What is the expected value of this lottery? What is the expected utility of this lottery if u(x) = Assume he could buy insurance at price P that could pay $9,900 in case of injury. What is the highest value of P that makes it worthwhile for Alex to purchase insurance? What is the certainty…Stewart will have a total wealth of $12,000 this year, if he stays healthy. Suppose Stewart has a 50% chance of staying healthy and a 50% chance of getting sick. If Stewart gets sick, then he will have to pay $8,000 for medical bills, leaving him $4,000 of total wealth. Under these conditions, Stewarts expected wealth (a.k.a. expected value of wealth) is $8,000. Based on the graph shown below, what level of wealth with certainty (i.e., wealth that Stewart is certain to have) would make Stewart equally as happy as he is when facing the 50% chance of being sick?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:…
- 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?[**] Simon has current wealth of $36, including $20 in cash. With probabil- ity Simon's money will be stolen (contingency 1), leaving him with only $16 to spend on consumption, and with probability his cash will not be stolen (contingency 2) so he can spend the entire $36 on consumption. Simon has utility function u (0₁.0₂) = √6 + 2√ where c is consumption spending in contingency i. Show Transcribed Text 1. What is the expected value of Simons contingent consumption? 2. What is the expected utility of Simons contingent consumption? 3. What is Simons MRS at his current contingent consumption bundle 4. An insurance company offers to fully insure Simon against the risk of theft for a premium (price) of $P. That is, if Simon pays $P to the insurance company, then the insurer will replace Simons $20 in contingency 1. If Simon buys the insurance his contingent consumption bundle is therefore (36 P; 36 P). i. What is Simons MRS at the fully insured contingent consumption bundle? ii. At what…Choice under uncertainty Alice would be willing to pay up to £15 for a gamble giving a 35% chance of £50 and a 65% chance of £10. 5. (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.