“A risk-averse individual will always full insure, meaning that uncertainty is irrelevant.” Discuss this comment using relevant model(s) studied in the unit.
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2. “A risk-averse individual will always full insure, meaning that uncertainty is irrelevant.” Discuss this comment using relevant model(s) studied in the unit.
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- Explain the difference between risk and uncertaintyA. From the graph below explain how an insurance plan which provides the buyer a $15,000 wealth level, regardless of any uncertain event, is a good deal for the buyer? In other words, what does the distance between points D’ and C’ represent? Note we are referring to D prime, not D. B. Considering the graph below, can you explain the difference between expected utility and certainty utility?Define risk aversion and give an example of a risk-averse person?
- Jamal has a utility function U = W1/2, where W is his wealth in millions of dollars and U is the utility he obtains from that wealth. In the final stage of a game show, the host offers Jamal a choice between (A) $4 million for sure, or (B) a gamble that pays $1 million with probability 0.6 and $9 million with probability 0.4. (1) Does A or B offer Jamal a higher expected utility? Explain your reasoning with calculations. (2) Should Jamal pick A or B? Why? I would like help with the unanswered last parts of the questions.A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth within the next year. a. What is the consumer's expected wealth one year from now? b. An insurance company offers our consumer full insurance against the possible loss. What premium must the consumer be charged for the insurance company to expect to break even? c. Suppose our risk-averse consumer is indifferent between getting $85,000 wealth with certainty and facing the above described uncertain situation. What is the maximum premium that the insurance company will be able to charge this consumer for its full insurance policy?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?
- could you answer part b to this question or if you have time part a and part b but part is more important. thank you Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. b) What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?Abigail is a consumer whose utility is a function of her total wealth W. u(W ) = log W. Suppose that Abigail begins with initial wealth of A = 100 but will suffer a serious illness with probability π = 0.15 which will require extensive treatment costing L = 80. To hedge against this risk, Abigail considers buying a health insurance policy. She may buy as much insurance I as she wishes at a cost of p per dollar of coverage, so her payoffs in each state are Healthy Ill Probability 0.85 0.15 No Insurance 100 20 Claim 0 I Premium −pI −pI a) Show that Abigail is risk averse. b) Suppose that the insurance premiums are actuarially fair so that p = 0. Find Abigail’s expected wealth E[W ] and expected utility E[u(W )] as functions of how much insurance she buys I. c) How much insurance should Abigail buy?Abigail is a consumer whose utility is a function of her total wealth W. u(W ) = log W. Suppose that Abigail begins with initial wealth of A = 100 but will suffer a serious illness with probability π = 0.15 which will require extensive treatment costing L = 80. To hedge against this risk, Abigail considers buying a health insurance policy. She may buy as much insurance I as she wishes at a cost of p per dollar of coverage, so her payoffs in each state are Healthy Ill Probability 0.85 0.15 No Insurance 100 20 Claim 0 I Premium −pI −pI a) Now suppose that the insurance company raises premiums to p = 0.2 so that they are no longer actuarially fair. Find Abigail’s expected wealth E[W ] and expected utility E[u(W )]. b) How much insurance should Abigail buy now?
- What term do economists use to describe the tendency for people to prefer certain outcomes over risky situations? a. The precautionary principle b. Risk differentiationc. Risk uncertainty d. Risk aversion e. Risk managementA person's utility function is U = C1/2 . C is the amount of consumption they have in a given period. Their income is $40,000/year and there is a 2% chance that they'll be involved in a catastrophic accident that will cost them $30,000 next year. a. Calculate the actuarially fair insurance premium. What would your expected utility be if you were to purchase the actuarially fair insurance premium? b. What is the most you would be willing to pay for insurance, given your utility function?Suppose that Mira has a utility function given by U=2I+10√I. She is considering two job opportunities. The first job pays a salary of $40,000 for sure. The second job pays a base salary of $20,000 but offers the possibility of a $40,000 bonus on top of your base salary. She believes that there is a probability of p=0.50 that she will earn the bonus. What is the expected salary of the second job? Which offer gives Mira a higher expected utility? Based on this information, is Mira risk adverse, risk neutral, or risk-loving?
