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Problem Solving. Solve the following problems completely.
2. You have identified two risks with a 18% and a 25% chance of occurring. They will
cost you P50,000 and P98,000 if both risks happen.
a. What is the expected monetary value of the first event?
b. What is the expected monetary value of the second event?
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Solved in 3 steps
- A plaintiff believes that there is a 30% chance that he will winIf he wins, he will gain $50,000. It costs him $5000 in non‐recoverable litigation costs to take the case to court. If the plaintiff is risk‐neutral, which of the following is true? A) The plaintiff will take the case to court with an expected net‐gain of $10,000 B) The plaintiff will take the case to court with an expected net‐gain of $15,000 C) The plaintiff will not take the case to court because he is afraid of losing. D) None of the above3. Assume W(F)=F². Probability of sun is 2/3 and hurricane, 1/3. Plot the IC that runs through Fs, Fh=(400, 400). Plot the constant expected consumption line that run through the same point. Is this person risk neutral or risk averse?Uncertainty and willingness to pay for insurance. Utility = (Wealth)1/3 Prob(flood) = .04 Prob(no flood) = .96 Total wealth if flood = $100,000. Total Wealth if no flood = $800,000. Find: (i) expected value, (ii) expected utility, (iii) certainty equivalent, and (iv) maximum willingness to pay for a policy that provides 100% flood insurance coverage. Draw the utility function and include all solved values on the diagram. What is the average gross profit per insurance customer, if each customer is charged his own maximum willingness to pay?
- Q1) An expected utility maximiser owns a car worth £60000£60000 and has a bank account with £20000£20000. The money in the bank is safe, but there is a 50%50% probability that the car will be stolen. The utility of wealth for the agent is u(y)=ln(y)u(y)=ln(y) and they have no other assets. Q2) Consider the setup from Question 1. A risk-neutral insurance company is willing to insure the car at the premium of π=£2/3π=£2/3 for every one pound of coverage. Q3) Consider the setup from Questions 1 and 2. How much profits, in expectation, does the insurance company earn on insuring the individual?Uncertainty The Utility function is U = W1/3Flood occurs with Probabilities=1/25. The Value of a house is $450,000 if no flood. Aftera flood, the value is $50,000. Cost of insurance is 10 cents per dollar.a. Calculate EU b. Calculate EV c. Calculate CE d. Calculate RP e. Calculate the variance and standard deviation f. How much insurance should you buy? Assume your are paying premium in all events.g. What is the expected profit of the insurance company? h. Calculate the coefficient of absolute and relative risk aversionYou have $1,000 that you can invest. If you buy Ford stock, you face the following returns and probabilities from holding the stock for one year: with a probability of 0.2 you will get $1,500; with a probability of 0.4 you will get $1,100; and with a probability of 0.4 you will get $900. If you put the money into the bank, in one year’s time you will get $1,100 for certain. a) What is the expected value of your earnings from investing in Ford stock? b) Suppose you are risk-averse. Can we say for sure whether you will invest in Ford stock or put your money into the bank?
- The Utility fct is U = W2/3 + 1000Flood occurs with Probabilities=1/20. The Value of house ✩540,000 if no flood. After aflood, the value is ✩40,000. Cost of insurance is 20 cents per dollar.a. Calculate EUb. Calculate EVc. Calculate CEd. Calculate RPe. Calculate the variance and standard deviationf. How much insurance should you buy? Assume your are paying premium in all event.g. What is the expected profit of the insurance company?h. Calculate the coefficient of absolute risk aversioni. Calculate the coefficient of relative risk aversionGavin Jones’s friend is planning to invest $1 million in a rockconcert to be held 1 year from now. The friend figures that he will obtain $2.8 million revenue from his $1 million investment—unless it rains. If it rains, he will lose his entire investment. There is a 50% chance that it will rain the day of the concert. Gavin suggests that he buy rain insurance. He can buy one unit of insurance for $0.50, and this unit pays $1 if it rains and nothing if it does not. He may purchase as many units as he wishes, up to $2.8 million.(a) What is the expected rate of return on his investment if he buys u units of insurance? (The cost of insurance is in addition to his $1 million investment.)(b) What number of units will minimize the variance of his return? What is this minimum value? And what is the corresponding expected rate of them? [Hint: Before calculating a general expression for variance, think about a simple answer.]Moral Hasard and Insurance The utility is U = W1/2 − 350S + 95S1/2 ; where W is wealth and S is care taken to avoid accidents. Probability of accident is 0.70 − S1/2 Wealth is ✩850,000 without accident and ✩300,000 with accident. Calculate S, EU and CE without insurance. Calculate S and EU with full insurance
- You’re the manager of global opportunities for a U.S. Manufacturer, who is considering expanding sales into Asia. Your market research has identified the market potential in Malaysia, Philippines, and Singapore as described next: Success Level Malaysia Philippines Singapore Probability Units Probability Units Probability Units Big 0.3 1,200,000 0.3 1,000,000 0.7 700,000 Mediocre 0.3 600,000 0.5 320,000 0.2 400,000 Failure 0.4 0 0.2 0 0.1 0 The product sells for $10 and has unit costs of $8. If you can enter only one market, and the cost of entering the market (regardless of…A lottery system has balls numbered 1 to 65 and randomly selects 6 of the lottery balls. There is only one prize of $ 10,000,000.00 which is awarded only it a lottery player selects the correct set of 6 lottery balls. a) If a lottery ticket costs $ 5.00, what is a lottery player's expected value? b) How much would the lottery prize have to be worth if it was to be a fair game? (Note: Include dollar signs in your answer)Give example of risk encounter life today (school, organization, outside of your house like traveling from school to house, etc) and apply the Risk Management Process.