(a) Will this individual participate in the lottery? (b) Calculate this individual's certainty equivalent associated with the lottery. What is his risk premium?
Q: [MUST SHOW WORK] Suppose the Bank of Canada uses open market operations to raise the overnight…
A: The open market operation is monetary policy tool which is used by the central bank of a country.…
Q: 4. A consumer lives on an island where she produces two goods, x and y according to production…
A: The utility function refers to all those commodity bundles that derive the same amount of utility…
Q: On the following graph, the black line shows potential real GDP and the blue line shows actual real…
A: GDP or gross domestic product is the sum of the value of all end commodities produced within the…
Q: Question 4 [Drawing upon the principles of the loanable funds market model, assume that the…
A: Loanable Funds Market: In the market for loanable funds there are economic agents like governments,…
Q: 2 Two countries, Aquarium and Lillbanum, trade with each other. We call the products wild boar…
A: PPF stands for Production Possibility Frontier, which is a graphical representation of the different…
Q: Derive the life-time budget constraint of this consumer. Set up the consumer’s problem. Solve for…
A: A consumer who chooses between consuming goods and enjoying leisure in the current and future…
Q: Assume a monopolist faces the following inverse curve: Q = Ap-2. The monop- olist produces at the…
A: Monopolist: A monopolist is a single seller in the market and hence he faces the downward sloping…
Q: Susie Lee won a lottery. She will have a choice of receiving $25,000 at the end of each year for the…
A: Present value is the value of investment in today's dollar. Future value is the value of investment…
Q: 1. Suppose that firm’s technology is given by the following production function: Q(K,L)= L1/2K1/2…
A: The production function: Q(K,L)=L1/2K1/2 Wage rate =2 and r =2 The return to scale of a…
Q: Mary owns a Mrs. Field's cookie shop. The number of cookies sold in a day, x, depends on the price…
A: Mary owns a cookie shop. The number of cookies sold in a day is represented by x. It depends on…
Q: in the simple mit pricing model, the entrant moves first to choose to Enter the market or Stay Out.…
A: Demand function : P= 14 - Q Marginal Cost = 2 There are two players : Entrant & Incumbent…
Q: Consider a prosperous open economy such as Singapore. If Singapore’s saving rate (gross domestic…
A: In an open economy, aggregate expenditure is a sum of consumption (C), investment (I), government…
Q: 1.In what cases is the logit/probit model used? example? 2. In what cases is the ordered…
A: A binary choice model is a statistical model used to analyze situations where the dependent variable…
Q: Discuss CBAM and other possible carbon border adjustment mechanisms (why, effects on trade, legality…
A: The CBAM rule would extend the carbon price paid by EU businesses to overseas manufacturers of the…
Q: Find the periodic payments PMT necessary to accumulate the given amount in an annuity account. HINT…
A: Future value is a concept in economics that refers to the value of an investment at a specified time…
Q: The estimated monthly sales of Mona Lisa paint-by-number sets is given by the formula q = 95e−3p2 +…
A: The estimated monthly sales of Mona Lisa paint-by-number sets is given by the formula q = 95e−3p2 +…
Q: Consider the income-expenditure identity in the closed economy of Macroland, Y = C + I + G. Suppose…
A: The economy is closed. Consumption is always a fraction MPC of income. i.e., C = MPC * Y…
Q: An emerging country has a real GDP of $1532.8 billion. After one year, real GDP has grown to $1.640…
A: The GDP growth rate is the increase in the GDP of a country over a specific period, usually…
Q: This question has to do with the minimum wage serving as an anti-poverty program. a. What…
A: Means-tested government benefits refer to programs that provide financial assistance or other types…
Q: a) The price per unit of consumption is 1, the hourly wage is w, and the worker has a non-labor…
A: Consumption: Consumption refers to the goods and services that a person uses to satisfy their wants…
Q: Assume the real interest rate is still 10%. If the firm from the previous question (question 3) can…
A: PV factor in year N = (1.10)N. PDV in year N = Cash flow in year N x PV factor in year N
Q: In an open economy, gross domestic product equals $2,450 billion, consumption expenditure equals…
A: GDP is the gross domestic product. GDP is the market value of all the goods and services produced…
Q: For a perfectly competitive firm, O a. demand is perfectly elastic. O b. producers must lower the…
A: In a perfectly competitive market, there are large number of buyers and sellers. The product sold is…
Q: Westchesser Gloves is a monopolistically competitive firm that sells leather gloves. a. In the graph…
A: Monopolistic competition is a market structure characterized by a large number of firms that produce…
Q: Internal rates of return for three alternative investment projects follow. Each project has a…
A: IRR: IRR or the internal rate of return is the rate of return created by a project where the cash…
Q: Compare and contrast, by making use of two graphs the policy options of liability and property…
A: There are different policy options for addressing environmental pollution, specifically focusing on…
Q: As the manager of Smith Construction, you need to make a decision on the number of homes to build in…
A: When the gap between total revenue and total costs is maximized, profit is produced. The difference…
Q: Which of the following statements about the income velocity of money (V) is NOT correct? a. It is an…
A: The income velocity of money (V) is defined as the number of times per year that a unit of currency…
Q: Profits from recycling paper, cardboard, aluminum, and glass at a liberal arts college have…
A: Present value is a financial concept that represents the current worth of a future sum of money. It…
Q: Give typing answer with explanation and conclusion Suppose that a consumer’s demand curve for…
A: (a) Equilibrium price and quantity of medical care: The demand curve for medical care is given As…
Q: What do you think the long-run supply curve looks like for the Chinese furniture runner industry?…
A: Since it provides the economy with value by bringing labour to work on land, production is a…
Q: Consider a simple model to estimate the effect of factors on number of children of a women in…
A: Regression is a statistical method used to analyze the relationship between one or more independent…
Q: To evaluate the impact of FDI on business performance, we consider the following model In VAit = Bo…
A: Regression is a statistical method used to analyze the relationship between one or more independent…
Q: Recently, in response to the health complications of soda, many localities are considering a per-…
A: ***Since the student has not provided the demand function, so with the available information only…
Q: Suppose the European Union imposes trade sanctions (export quotas) on food sold to Russia. Imagine…
A: Trade sanctions are restrictions or barriers imposed by one country or group of countries on…
Q: The ____________ is the quantity where quantity demanded and quantity supplied are equal at a…
A: Demand schedule is the tabular representation of quantity demanded at various prices. Demand curve…
Q: Output per hour 0 1 2 3 4 5 Total Cost $ $ $ $ $ $ 1,000 1,200 1,600 2,200 3,000 4,000
A: We have to subtract total cost from total revenue to measure maximum profit
Q: (Figure: Shifts of the AD–AS Curves) Use Figure: Shifts of the AD–AS Curves. A decrease in wages in…
A: Aggregate demand is the amount of total spending on domestic goods and services in an economy.…
Q: The price elasticity of demand for Craig's chocolate chip cookies is 1.5. Craig wants to increase…
A: Elasticity of demand refers to the percentage change in the demand of a commodity with respect to…
Q: All of the following are drivers of globalization EXCEPT a. Market Drivers b. Cultural Drivers…
A: Globalization is the process of increasing interconnectedness and interdependence among people,…
Q: Give typing answer with explanation and conclusion A state department of health is considering a…
A: To determine whether the public awareness campaign to encourage vaccination is worth undertaking, we…
Q: Assume the United States has been in another recession for the past 10 months. Unemployment is 10%…
A: The AD-AS (aggregate demand-aggregate supply) example demonstrates national income determination and…
Q: Describe these three arguments that are often used to justify trade barriers: the national security…
A: Trade restrictions are regulations put in place largely to safeguard a country's domestic economy.…
Q: a. derive the demand for labor. b. show that the demand for labor satisfies the law of demand.
A: production functions are used to describe the relationship between inputs (such as labor and…
Q: The Acmeville Metropolitan Bus Service currently charges $0.77 for an all-day ticket, and is used by…
A: Elasticity of supply is a measure used to analyze response of consumers when price of the good…
Q: A principal of $9250 compounded monthly amounts to $15676.52 in 7 years. What is the periodic and…
A: The interest rate before accounting for inflation is referred to as the nominal interest rate. The…
Q: A monopoly is considering selling several units of a homogeneous product as a single package.…
A: Monopoly is a single firm in the market. It has the market power to charge high price as there are…
Q: Assume two nuclear armed countries (say the US and the Soviet Union (USSR)) are locked in a…
A: There are two players in the game : USSR & US Strategy set of US = Strategy Set of USSR = {…
Q: Calculate the rate of return on the investment on the following cash flow. If MARR is 10%, should…
A: The rate of return refers to the annual growth rate that an investment will be expected to generate.…
Q: Currency Checking Account Balances Savings Account Balances Small-Denomination Time Deposits…
A: Money is the common medium used for exchanging goods and services in the market.
# 4
Consider an individual with a utility function of the form u(w) = √w. The individual has an initial wealth of $4. He has two investments options available to him. He can eitffer keep his wealth in an interest-free account or he can take part in a particularly generous lottery that provides $12 with probability of 1/2 and $0 with probability 1/2. Assume that this person does not have to incur a cost if he decides to take part in the lottery. (a) Will this individual participate in the lottery? (b) Calculate this individual's certainty equivalent associated with the lottery. What is his risk premium?
Step by step
Solved in 4 steps
- Gary likes to gamble. Donna offers to bet him $31 on the outcome of a boat race. If Gary’s boat wins, Donna would give him $31. If Gary’s boat does not win, Gary would give her $31. Gary’s utility function is p1x^21+p2x^22, where p1 and p2 are the probabilities of events 1 and 2 and where x1 and x2 are his wealth if events 1 and 2 occur respectively. Gary’s total wealth is currently only $80 and he believes that the probability that he will win the race is 0.3. Which of the following is correct? (please submit the number corresponding to the correct answer). Taking the bet would reduce his expected utility. Taking the bet would leave his expected utility unchanged. Taking the bet would increase his expected utility. There is not enough information to determine whether taking the bet would increase or decrease his expected utility. The information given in the problem is self-contradictory.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.Consider a person with the following utility function over wealth: u(w) = ew, where e is the exponential function (approximately equal to 2.7183) and w = wealth in hundreds of thousands of dollars. Suppose that this person has a 40% chance of wealth of $100,000 and a 60% chance of wealth of $2,000,000 as summarized by P(0.40, $100,000, $2,000,000). a. What is the expected value of wealth? b. Construct a graph of this utility function . c. Is this person risk averse, risk neutral, or a risk seeker? d. What is this person’s certainty equivalent for the prospect?
- Assume that your utility has a natural log function U(W)=ln(W), which is a concave function. Your car is worth $10,000 and your total wealth is $20,000 including the car. There is a 5% chance that a major accident occurs and you have a total loss of $10,000; a 10% chance that a minor accident occurs and you have a loss of $500; 85% chance you will not have any accident. Given these assumptions, how much are you willing to pay for an insurance that provides full coverage against car accidents? Thank you. Regards, Jim CarrollStewart 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?. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = square root x. 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?
- Khalid has a utility function U = W1/2, where W is his wealth in millions of dollarsand U is the utility he obtains from the wealth. In a game show, the host offershim a choice between (A) $4 million for sure, or (B) a gamble that pays $1million with probability 0.6 and $9 million with probability 0.4.i. Graph Khalid’s utility function with the help of above utility function. Ishe risk lover? Explain. ii. Does A or B choice offer Khalid a higher expected prize? Explain yourreasoning with appropriate calculations. iii. Does A or B offer Khalid a higher expected utility? Again, show yourcalculations. iv. Should Jamal pick A or B choice? Why?You are considering a $500,000 investment in the fast-food industry and have narrowed your choice to either a McDonald’s or a Penn Station East Coast Subs franchise. McDonald’s indicates that, based on the location where you are proposing to open a new restaurant, there is a 25 percent probability that aggregate 10-year profits (net of the initial investment) will be $16 million, a 50 percent probability that profits will be $8 million, and a 25 percent probability that profits will be −$1.6 million. The aggregate 10-year profit projections (net of the initial investment) for a Penn Station East Coast Subs franchise is $48 million with a 2.5 percent probability, $8 million with a 95 percent probability, and −$48 million with a 2.5 percent probability. Considering both the risk and expected profitability of these two investment opportunities, which is the better investment? Explain carefully.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. a. b. c. d. Graph Jamal’s utility function. Is he risk averse? Explain. (2+2) Does A or B offer Jamal a higher expected prize? Explain your reasoning with appropriate calculations. (1) Does A or B offer Jamal a higher expected utility? Explain your reasoning with calculations. (2) Should Jamal pick A or B? Why?
- . Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) √x . 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.Max Pentridge is thinking of starting a pinball palace near a large Melbourne university. His utility is given by u(W) = 1 - (5,000/W), where W is his wealth. Max's total wealth is $10,000. With probability p = 0.9 the palace will succeed and Max's wealth will grow from $10,000 to $x. With probability 1 - p the palace will be a failure and he’ll lose $5,000, so that his wealth will be just $5,000. What is the smallest value of x that would be sufficient to make Max want to invest in the pinball palace rather than have a wealth of $10,000 with certainty? ____ (Please round your final answer to the whole dollar, if necessary)Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = square root x . 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
