Joes initial income is y 10,000. Joe experiences illness with a probability of 20%. Jo's total medical costs associated with the illness are $1000. Joe's expected income without insurance is
Q: One investment option will give a guaranteed income of $100,000. An alternative option is risky -…
A: Risk-averse: - it is a strategy or the nature of the person of avoiding risk involved in capital…
Q: an expected utility maximiser owns a car worth £60 000 and has a bank account with £20 000. The…
A: Expected utility maxi-miser:- In economics, the anticipated utility hypothesis is a well-known idea…
Q: An investor considers investing $17,000 in the stock market. He believes that the probability is…
A: Probability tells us the approximate chance of things taking place. It basically briefs us about the…
Q: You need to hire some new employees to staff your startup venture. You know that potential employees…
A: Given information Employee Value Probability $65,000 0.1 $78,000 0.1 $91,000 0.1…
Q: Find the values of Absolute Risk Aversion (ARA) and Relative Risk Aversion (RRA) for all the cases…
A: Recall that, coefficient of Absolute risk aversion is given by: -∂2U∂C2∂U∂C coefficient of…
Q: Jane loves risk; her Bernoulli utility function is given by u(w) = w². She participates in a ottery…
A: Given information: Jane is a risk lover and its utility function is given below: u = w2 where 'w' is…
Q: Diego's current wealth is $800, but there is a 0.2 probability that he will lose $100. Diego is risk…
A: Given; Current wealth= $800 Probability of losing $100= 0.2 Diego is a risk neutral person.
Q: expected utility maximiser owns a car worth £60 000 and has a bank account with £20 000. Them , but…
A: DISCLAIMER “Since you have asked multiple question, we will solve the first question for you. If…
Q: Consider Ms Ayse who has an apartment in Istanbul. Ms Ayse thinks the probability of an earthquake…
A: Equilibrium is established where expected utility is equal to the utility which is left over after…
Q: Define Expected Shortfall (ES), which is also called "Conditional Value at Risk "Expected Tail…
A: Conditional Value at Risk (CVaR), otherwise called the expected shortfall.
Q: Yuri owns just one ship, he calls it Previt. The ship is worth $25 million dollars. If the ship…
A: Insurance provides coverage over the risk. For claiming insurance people need to pay the premium and…
Q: remain uninsured? 5. Amanda has a utility of money function of u(w)=wª. Her initial wealth is…
A: The utility that an entity or the entire economy is projected to accomplish in a variety of…
Q: Consider an insurance contract with the premium r=$200 and payout q=$800. a.) John has…
A: a. Fair contract premium can be calculated by using the following formula.
Q: Your utility function is U = w, where W is your wealth. Your current wealth is $800. There is a 25%…
A: Basics:- Risk Averse:- It means play safely with investment options. In other words taking less or…
Q: Suppose that Lizzo's utility function U is given by U = w.53, where w is wealth. Lizzo has wealth of…
A: Disclaimer: Since you have posted a multi-part question, I am providing you with the answer to the…
Q: Suppose in a given state's new insurance marketplace, with community rating and no restrictions on…
A: When one of the insurers is allowed to charge any premium to the people and also allowed to exclude…
Q: opening 2018 World Cup odds against being the winning team specified by espn.com were 9/2 for…
A: It is known that the formula to compute the odds for the winning team is: Odds against =Number of…
Q: You need to hire some new employees to staff your startup venture. You know that potential employees…
A: The expected value of hiring: Expected value of hiring = 0.1 35000 + 46000 +…
Q: Your software development company is considering investing in a new mobile app. If it goes viral…
A: NPV:- Net present value is the difference between the current worth of cash inflows and withdrawals…
Q: In a game, there are three values 1, 000, 2.500 and 5,000 and the cost of the game is 1, 500 . If…
A: Expected Value refers to the anticipated value for investment at some point in the future period. it…
Q: Deborah is at the casino and is considering playing Roulette. In Roulette, a ball drops into one of…
A: In economics, risk refers to the possibility of an unfavorable outcome. People are generally…
Q: Consider the model of competitive insurance. Peter is a risk averse individual with the utility…
A: A individual (the Policyholder) and an insurance company enter into a binding legal contract in…
Q: Insurance: An insurance company sells a l-year term life insurance policy to an 84-year-old man. The…
A: Given Insurance premium =$1600 The probability that the 84-year old man will be alive 1 year later…
Q: Suppose that the probability of low demand is 0.75. (a) What is the maximum Expected Monetary…
A: The law of demand is a basic rule of economics that states that at a higher price consumers will…
Q: Suppose that a person's utility function is the square root of wealth. Suppose the person earns…
A: Utility function indicates the satisfaction an individual earns from consumption. Consumption being…
Q: Indicate whether the statement is true, false, or unclear, and justify your answer.Ex post risk is…
A: The given statement is false.
Q: Monty Burns, the owner of the Springfield Nuclear Power Plant, owns many real estate properties. His…
A: Monty's Utility function : U(a) = w0.5 Miss b utility function : U(b) = y (where , y = income )…
Q: An individual has 40,000 in income per year. The person will get sick with probability 0.1. If he…
A: Given, Income if person does not get sick = M = 40,000 Utility (M) = 200 Probability of getting sick…
Q: Suppose that Lizzo's utility function U is given by U = wD.53 where w is wealth. Lizzo has wealth of…
A: The term "risk-averse" basically refers to an investor who prioritizes capital preservation over the…
Q: The manager of XYZ Company is introducing a new product that will yield N$1000 in profits if the…
A: Formula to calculate: Expected profit = summation (state of economy * Expected profits.
Q: Exercise 3: Risky Investment Charlie has von Neumann-Morgenstern utility function u(x) = ln r and…
A: "Expected utility" is an economic term that describes the utility that an entity or the aggregate…
Q: son is trying to sell cars. The number of cars that she will sell depends on her eno "e" and her…
A: Utility maximization is an essential plan by which individuals and companies look to accomplish the…
Q: Abigail is a consumer whose utility is a function of her total wealth W. u(W ) = log W.…
A: Given information Utility function of Abigail u(W)=log W Initial wealth =100 Probability of…
Q: 2) Suppose you own a car worth $20,000. You have accident insurance, but your policy does not cover…
A: As the player is risk neutral his utility function would be possibly of the form : U(w) = W Car's…
Q: Joey has utility function 1+√x where x is the amount of money he has. He is... A) Cannot tell from…
A: Given utility function - U = 1+√x
Q: A charter school operator gets utility out of the number of students she enrolls, where U =…
A: The utility is Given as U = Students0.7 Probability of enroll 100 students = 0.75 Probability of…
Q: Monty Burns, the owner of the Springfield Nuclear Power Plant, owns many real estate properties. His…
A: Monty's Utility function : U(a) = w0.5 Miss b utility function : U(b) = y (where , y = income )…
Q: Suppose Stuart's utility function is U=200Y°. His initial income is £10,000. With probability 0.3 he…
A: Stuart's Utility function : U = 200Y0.5 Initial Income = 10000 Probability of falling ill = 0.3…
Q: has $11,000 and she wants to invest in financial market. There are two ty ts. The first one…
A: Expected utility" is an economic word that describes the utility that an entity or the entire…
Q: "Jay, a writer of novels, just has completed a new thriller novel. A movie company and a TV network…
A: Small Box-Office:The probability of small box-office earning = 0.27Earnings = $210,000Probability of…
Q: You need to hire some new employees to staff your start-up venture. You know that potential…
A: The expected value can be calculated using the following equation.
Q: "Jay, a writer of novels, just has completed a new thriller novel. A movie company and a TV network…
A: Small Box-Office Earning:The probability of small box-office earning = 0.27Earnings =…
Q: expected utility maximiser owns a car worth £60000£60000 and has a bank account with £20000£20000.…
A: A normal utility maximiser is a hypothetical specialist who thinks about its activities, processes…
Q: risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth…
A: Here, we calculate the given as follow;
Q: With reference to Fig. 5-3, if the individual's income is either OA = $30,000 with probability of…
A: Income (OA)= $30000 with probability (p) = 0.95 or Income (OB) = $5000 with probability (1-p) =…
Q: Abigail is a consumer whose utility is a function of her total wealth W. u(W ) = log W.…
A: Given information Utility function of Abigail u(W)=log W Initial wealth =100 Probability of…
Q: An individual has a utility function U(W) = VW , where W is the level of wealth. They have been…
A: Certainty equivalent is a certain amount of money that make use indifferent between getting money…
Q: Consider an individual with an expected utility function of the form u(w) = √wwhere wrep- resents…
A: The expected utility and probability of loss would decide the maximum price that individual would…
Q: David is an expected-utility maximizer that likes to drive fast (and reckless at times), so his…
A: An expected utility maximiser is a theoretical agent that evaluates its acts, calculates their…
Joes initial income is y 10,000. Joe experiences illness with a probability of 20%. Jo's total medical costs associated with the illness are $1000. Joe's expected income without insurance is
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
- Calculate expected value of a probability distribution. Decisions Recognizing RiskConsider an individual with an expected utility function of the form u(w) = √wwhere wrep-resents this individual’s wealth. This individual currently has wealth of $100. This individualfaces a risk of losing $64 with a probability of (1/2). The maximum price that this individualwould pay for insurance that covers the entire $64 loss is?Wanda works as a waitress and consequently has the opportunity to earn cash tips that are not reported by her employer to the Internal Revenue Service. Her tip income is rather variable. In a good year (G), she earns a high income, so her tax liability to the IRS is $5000. In a bad year (B), she earns a low income, and her tax liability to the IRS is $0. The IRS knows that the probability of her having a good year is 0.6, and the probability of her having a bad year is 0.4, but it doesn’t know for sure which outcome has resulted for her this tax year. In this game, first Wanda decides how much income to report to the IRS. If she reports high income (H), she pays the IRS $5000. If she reports low income (L), she pays the IRS $0. Then the IRS has to decide whether to audit Wanda. If she reports high income, they do not audit, because they automatically know they’re already receiving the tax payment Wanda owes. If she reports low income, then the IRS can either audit (A) or not audit…
- Deborah is at the casino and is considering playing Roulette. In Roulette, a ball drops into one of 36 slots on a spinning wheel. 17 of the slots are red, 17 are black, and 2 are green. Each slot is equally likely and occurs with probability 1/36. Deborah bets $1.00 on black. If the ball drops into a black slot she receives $2.00 and if it drops into a red or green slot, she receives nothing. a) The expected value of Deborah’s bet (after subtracting the $1.00 she bet) is $________________ b) Given that Deborah makes this bet, is she risk adverse, risk neutral, or risk loving?Consider an insurance contract with the premium r=$200 and payout q=$800. a.) John has healthy-state income IH = $900 and sick-state income IS = $100. He has probability of illness p = 0.2. Is the contract fair and/or full for John? What is John’s expected income WITHOUT this insurance contract? What is John’s expected income WITH this insurance contract?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?Dr. Gambles has a utility function given as U(w)=In(w). Due to the pandemic affecting his consulting business, Dr Gambles faces the prospect of having his wealth reduced to £2 or £75,000 or £100,000 with probabilities of 0.15, 0.25, and 0.60, respectively. Suppose insurance is available that will protect his wealth from this risk. How much would he be willing to pay for such insurance?Obi-Wan is considering whether to buy a lightsaber. With probability 0.50 he will value the lightsaber at $4,000, and with probability 0.50 he will value it at $1,000. If new lightsabers sell for $2,500, then buying a new lightsaber is a: Multiple Choice fair gamble. better-than-fair gamble. less-than-fair gamble. less-than-fair gamble if Obi-Wan risk neutral.
- 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.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.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?