Answered: Calculate the expected utility of John…

Calculate the expected utility of John when he faces the risky prospect X = {4, 9, 16, 25; 0.2, 0.3, 0.3, 0.2} . His utility function isu ( x ) = 50 x − x 2 , where x is wealth. (Use two decimals)

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.1P

See similar textbooks

Related questions

Q: Which of the following describes the attribute of a risk neutral investor? Select one: a. An…

A: Risk neutral is a term that is utilized to portray financial backers who are harsh toward risk. The…

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: With an initial wealth of $160,000, a consumer who abides by the von Neumann-Morgenstern axioms…

A: A utility function or activity is a representation that defines individual preferences for goods or…

Q: Shimadzu, a manufacturer of precise scientific instruments, relies heavily on the efforts of its…

A: The optimal managerial compensation contract is portrayed in a climate in which the. administrator…

Q: Which statement is true? Always select a portfolio on a person's highest indifference curve, to…

A: An indifference curve displays two commodities that provide equal pleasure and usefulness, making…

Q: Calculate the risk premium of John when he faces the risky prospect X = {1, 4, 9, 16; 0.2, 0.4, 0.4,…

A: We are going to calculate Certainty equivalent and Expected Value to answer this question.

Q: The Allais Paradox suggests that expected utility fails because people tend to dislike losses more…

A: Option B All Options are correct Allais paradox discusses human irrationality Independence axiom of…

Q: Portfolios A, B, and C all lie on the efficient frontier that allows for risk-free borrowing and…

A: Given that Portfolios A, B, and C all lie on the efficient frontier that allows for risk-free…

Q: Review the concept of value at risk (VaR) in chapter 5. Evaluate the following two cases and decide…

A: Value at Risk (VaR) is a metric that measures the magnitude of potential financial losses inside a…

Q: Consider two individuals, Dave and Eva. Both Dave and Eva have initial wealth 810, 000 and face a…

A: “Since you have posted a question with multiple sub-parts, we will solve the first three sub-parts…

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: Angie owns an endive farm that will be worth $90,000 or $0 with equal probability. Her Bernouilli…

A: As given in question: (a)Angie farm wealth (w1) = $90.000 When every thing goes wrong farm wealth…

Q: Jamal has a utility function U = W1/2, where W is his wealth in millions of dollars and U is the…

A: "Since you have asked a question with multiple sub-parts, we will solve the first three sub-parts…

Q: The expected value of perfect information is calculated by subtracting: a. the minimum…

A: Expected value is obtained by summing up all the value of multiplying the possible value with…

Q: An investor is considering three strategies for a $1,000 investment. The probable returns are…

Q: Khalid has a utility function U = W1/2, where W is his wealth in millions of dollars and U is the…

A: The utility function is given as, Answer (i) Figure (1) below depicts the given utility…

Q: The manager of XYZ Company is introducing a new product that will yield $1,000 in profits if the…

Q: Amy has a utility function U = 4P, where P represents the payment. Amy also has an investment…

A: Given Utility function U=4P .........(1) Amy has investment opportunity that pays $49 with…

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: 7. Ann can organize a concert in either of two locations: Club or Park. If the concert is in the…

A: Risk Averse refers to the term or concept where an individual faces alternatives of a…

Q: Sarah has a coefficient of risk aversion of 2. Sheng has a coefficient of risk aversion of 4. Given…

A: An indifference curve is a curve that provides information about the equal satisfaction gained by an…

Q: Question 2 A person has a wealth of $20,000 but faces an accident that results in a loss of S12.000…

A: Bernoulli utility function is a type of utility function that shows a risk-taking behavior in such a…

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: 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: Vhat is the behavior of a person with the following utility function? 1 0.8 0.6 5 0.4 0.2 $0 $50…

A: Each and every investment is associated with risk. Thus a person taking a risk can be of three types…

Q: Can you explain how Constant Relative Risk Aversion utility function should be understood and how it…

Q: Consider two individuals whose utility function over wealth I is ?(?) = √?. Both people face a 10…

A: Insurance: It refers to protection from financial loss.

Q: Mary's utility function for her asset position x is given by u(x) = 4"x^2+ 2*x^ 1/2. Currently.…

A: To answer this question, we should calculate the expected utility in presence of insurance and…

Q: For constants a and b, 0 < b, b 1, and expected profit E(p), the expected utility function of a…

A: Given information a and b are constant b>0 Person is risk-neutral.

Q: Suppose Caroline is choosing how to allocate her portfolio between two asset classes: risk-free…

A: Part 1) As we can observe that from point A to E, as the average(avg) annual return increases the…

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: Define risk-seeking.

A: Risk refers to the possibility of happening something undesirable, People take risk to achieve…

Q: 10. Which one of the following measures may be used to measure the risk of an investment on its own?…

A: Investment is an essential part of creating wealth as well as attain higher economic growth and…

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: The value of a successful project is $420,000; the probabilities of success are 1/2 with good…

A: Since it is given that:Value of a successful project, given that, there is good supervision, P(B∩G)…

Q: Define risk pooling.

A: Risk pooling refers to health insurance, representing a group of individuals contributing to a…

Q: Consider a coin toss experiment and the following assets. Asset A gives £200 if the first is heads,…

A: Let P be the probability of the event. Also, it is assumed that the tossed coin is unbiased in…

Q: John Davidson is an investment adviser at Leeds Asset Management plc. He is asked by a client to…

A: a) Sharp Ratio = Rp -RfσpRp = Protfolio returnRf = Risk free rateσp= Portfolio standerd daviation

Q: Company ABC holds an auction. Five bidders were invited. Company ABC estimates that each bidder has…

A: The table could be constructed as: x P(x) 15 0.50 25 0.50

Q: At the start of 2018, Gina had an estimated wealth of $150,000. During the year of $2018, she earned…

A: The quantity of valuable commercial products amassed or accumulated at a particular moment is what…

Q: A moderately risk-averse investor has 50% of her portfolio invested in stocks and 50% in risk-free…

A: A budget imperative addresses every one of the blends of labor and products that a customer might…

Q: What is the expected return from an investment if there is a 20 percent chance of a 4 percent…

A: The return on the investment will be calculated based on the weighted average Return on the…

Q: Suppose that Jim has a von Neumann-Morgenstern utility function: U(c) = c². %3D Based on his utility…

A: Given, U(c) = C2 Risk-averse people are those who prefer not to take any risk or want to reduce the…

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: Emilio offers you two options: $890 today or $X in 11 years. Suppose that you are not risk averse.…

A: Given: Options: 1-$890 today 2-X in 11 years Interest rate=6% To find: Value of X

Q: Consider an insurance contract with the premium r=$200 and payout q=$800. What is John’s expected…

A: Given Information: insurance contract offers- premium r = $200 payout q = $800'

Question

Calculate the expected utility of John when he faces the risky prospect X = {4, 9, 16, 25; 0.2, 0.3, 0.3, 0.2} . His utility function isu ( x ) = 50 x − x 2 , where x is wealth. (Use two decimals)

________

Expert Solution

This question has been solved!

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

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Introduction:

VIEW

Approach:

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 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

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.
Studies have concluded that a college degree is a very good investment. Suppose that a college graduate earns about 75% more money per hour than a high-school graduate. If the lifetime earnings of a high-school graduate average $1,200,000, what is the expected value of earning a college degree?
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 Carroll
A company owns an asset that is worth $245,000 and there is a 6% chance that it will lose $185,000 in value, otherwise it will not change. If the company has an expected utility functions with u(x) = x0.5, then the expected utility for the company is 480 464 460 456
A couples house is $192,00 and their auto is $9,500. Assume that their home is now appraised at $200,000 and the value of their automobile has dropped to $8,700. Calculate and characterize the effects of these changes on their net worth.
The value of Jon’s stock portfolio is given by the function v(t) = 50 + 77t + 3t2, where v is the value of the portfolio in hundreds of dollars and t is the time in months. How much money did Jon start with? (y-intercept) What is the minimum value of Jon’s portfolio? (vertex)
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?
Leo owns one share of Anteras, a semiconductor chip company which may have to recall millions of chips. The stock currently trades at $100/share. Leo believes the probability that they have to recall the chips is 50%. If the chips have to be recalled, the stock price will be cut in half, but otherwise it will remain $100. The expected value of Leo's share is ______ Assume Leo has the utility function, U(X)=√X. The minimum price Leo would accept to sell his share is _______ Leo's risk premium is ________
Y = 30 - 25X + error What is the expected value of Y when X is 0? Y = 10 + 13.57*X + error By how much does the expected value of Y change if X increases by 18.02 units? (Round your answer to two decimal places: ex: 123.45)
The value of a portfolio to investors equals its expected return minus 35 times its variance. There is one stock in the economy. Rational investors believe that its expected return is 1. Irrational investors believe that its expected return is 1.8. All agree that the variance of the stock is 0.02. Graph on one graph the price of the stock as the number of shares go from 20 to 60 in three different circumstances: A: There are 260 investors, and all are rational. B: There are 260 investors. 200 are rational and 60 are irrational. Shorting is allowed. C: There are 260 investors. 200 are rational and 60 are irrational. Shorting is not allowed.
Suppose Alex’s utility function is u ($x) = √x. Assume her initial wealth is 0. Is it possible that Alex’s expected utility from the prospect equals $5, why? What is the possible range of Alex’s expected utility?
Calculate the risk premium of John when he faces the risky prospect X = {1, 4, 9, 16; 0.2, 0.4, 0.4, 0.0} . His utility function is u ( x ) = x , where x is wealth. (Use two decimals)