6) Leia has $11,000 and she wants to invest in financial market. There are two typesof assets. The first one guarantees 0.1 percent return next year. The second one is arisky asset which will yield 0.5 percent return in good times and 0.4 percent of lossin bad times. Suppose the chance of good and bad times is half-half and Leia's utilityfunction isU(Y) = Y 0.5%3Da). What is the expected utility if she invest in the first asset?b). What is the expected utility if she invest in the second asset? Will Leia chooses thefirst or the second asset?c). Suppose that Leia can purchase a financial insurance which cost her $100 andcover all her lost when bad times happen. Will she purchase this insurance?

Expected utility" is an economic word that describes the utility that an entity or the entire…

has $11,000 and she wants to invest in financial market. There are two ty ts. The first one guarantees 0.1 percent return next year. The second one sset which will yield 0.5 percent return in good times and 0.4 percent of times. Suppose the chance of good and bad times is half-half and Leia's ut n is U(Y) = Y 0.5 at is the expected utility if she invest in the first asset? at is the expected utility if she invest in the second asset? Will Leia chooses the second asset? pose that Leia can purchase a financial insurance which cost her $100 11 her lost when bad times happen. Will she purchase this insurance?

has $11,000 and she wants to invest in financial market. There are two ty ts. The first one guarantees 0.1 percent return next year. The second one sset which will yield 0.5 percent return in good times and 0.4 percent of times. Suppose the chance of good and bad times is half-half and Leia's ut n is U(Y) = Y 0.5 at is the expected utility if she invest in the first asset? at is the expected utility if she invest in the second asset? Will Leia chooses the second asset? pose that Leia can purchase a financial insurance which cost her $100 11 her lost when bad times happen. Will she purchase this insurance?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.7P

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