Agamble based on a fair coin toss which pays $6.65 if the coin lands heads and $9.85 if the coin lands tails. (fair coin toss i.e. probability of heads is 50% = probability of tails is 50%)EV$8.25E[U(w))UJEV]><=risk attitudeEU_>_U(EV) LowEU = U(EV) NeutralEU =_U(EV) Neutralu(w)w"624.81 $561.51u(w)125+w136.25 $136.25u(w)Sin(w)10.50 $10.50Arisk agent, whose utility is given by U(w) = 5In(W) and initialwealth is $5,000 is faced with a potential loss of $3,800 with a probabilityof p=0.17. What is the maximum premium they would be willing to pay toprotect themselves against this loss?risk appetite(wייטEVintial wealthEU41.375,000U(w-y) = E[U(w)]5In(5,000-y)=B17find yy= $1,077.13 If you are given the opportunity to buy insurance for $500alt y=would you take the insurance?Utility functions w>0u(w)w-9wu(w)5In(w)u'(w)u'(w)u"(w)u"(w)A'(w) :>,<,=0A'(w) :>,<,=0R'(w) : >,<,=0R'(w) :>,<=0show your workA(w)Alw)A'(w)A'(w)R(w)R(w)R'(w)R'(w)

the utility function estimates the government assistance or fulfillment of a customer as a function…

Answered: A gamble based on a fair coin toss…

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter17: Making Decisions With Uncertainty

Section: Chapter Questions

Problem 4MC

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