Prospect Y = ($6, 0.25 ; $15, 0.75) If Will's utility of wealth function is given by u(x)=x0.25, what is the value of CE(Y) for Will? (In other words, what is Will's certainty equivalent for prospect Y?)
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Prospect Y = ($6, 0.25 ; $15, 0.75)
If Will's utility of wealth function is given by u(x)=x0.25, what is the value of CE(Y) for Will? (In other words, what is Will's certainty equivalent for prospect Y?)
(The certainty equivalent represents the maximum amount a person would be willing to pay to acquire a risky prospect, and equivalently, the lowest price for which they would be willing to sell a risky prospect if they already owned it)
(Note: The answer may not be a whole number; please round to the nearest hundredth)
(Note: The numbers may change between questions, so read carefully)
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- Consider two individuals whose utility function over wealth I is ?(?) = √?. Both people face a 10 percent chance of getting sick, and foreach the total cost of illness equals $50,000. Suppose person A has a total net worth of $100,000, and person B has a total net worth of $1,000,000. Both people have the option to buy an actuarially fair insurance contract that would fully insure them against the cost of the illness. a. Using expected utility calculations, show that person A would certainly buy full, actuarially fair insurance. b. Suppose an insurance company wants to maximize profits and wants to charge each customer the maximum price they are willing to pay. How much should the insurance company charge each client so that both buy the contract? c. What is surprising about your result in part b? What does this tell you about how insurance companies may be pricing health insurance contracts in the real world?Please answer true or false for each of the following statements. A risk-averse consumer has increasing marginal utility. A risk-neutral consumer is willing to pay a positive risk-premium to avoid risk. A risk-neutral consumer has a linear utility function. A risk-loving consumer has a convex utility function. A risk-averse consumer can increase her expected utility by buying multiple stocks whose outcomes are not closely related, instead of buying only one stock.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 ________
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