Macroeconomics
13th Edition
ISBN: 9780134735696
Author: PARKIN, Michael
Publisher: Pearson,
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Chapter 20, Problem 8APA
(a)
To determine
Identify the J’s and Z’s
(b)
To determine
Identify the more risk averse person.
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Jamal has a utility function 1/2 U W5 , where W is hiswealth in millions of dollars and U is the utility heobtains from that wealth. In the final stage of agame show, the host offers Jamal a choice between(A) $4 million for sure and (B) a gamble that pays$1 million with probability 0.6 and $9 million withprobability 0.4.a. Graph Jamal’s utility function. Is he risk averse?Explain.b. Does A or B offer Jamal the higher expectedprize? Explain your reasoning with appropriatecalculations. (Hint: The expected value of arandom variable is the weighted average of thepossible outcomes, where the probabilities arethe weights.)c. Does A or B offer Jamal the higher expectedutility? Again, show your calculations.d. Should Jamal pick A or B? Why?
Jamal has a utility function U= W1/2 where Wis his wealth in millions of 'dollars and Uis the utility he obtains from that wealth. In the final stage
of a game show, the host offers Jamal a choice between (A) $4 million for sure, or (B) a gamble that pays $1million with a probability of 0.6 and $9 million with a probability of 0.4.
a. Graph Jamal's utility function. Is he risk-averse? Explain.
b. Does A or B offer, Jamal, a higher expected price? Explain your reasoning with appropriate calculations. (Hint: The expected value of a random variable is the weighted average of the possible outcomes, where the probabilities are the weights.)
c. Does A or B offer Jamal a higher expected utility? Again, show your calculations.
d. Should Jamal pick A or B? Why?
Khalid has a utility function U = W1/2, where W is his wealth in millions of dollarsand U is the utility he obtains from the wealth. In a game show, the host offershim a choice between (A) $4 million for sure, or (B) a gamble that pays $1million with probability 0.6 and $9 million with probability 0.4.i. Graph Khalid’s utility function with the help of above utility function. Ishe risk lover? Explain. ii. Does A or B choice offer Khalid a higher expected prize? Explain yourreasoning with appropriate calculations. iii. Does A or B offer Khalid a higher expected utility? Again, show yourcalculations. iv. Should Jamal pick A or B choice? Why?
Chapter 20 Solutions
Macroeconomics
Ch. 20.1 - Prob. 1RQCh. 20.1 - Prob. 2RQCh. 20.1 - Prob. 3RQCh. 20.1 - Prob. 4RQCh. 20.2 - Prob. 1RQCh. 20.2 - Prob. 2RQCh. 20.2 - Prob. 3RQCh. 20.2 - Prob. 4RQCh. 20.3 - Prob. 1RQCh. 20.3 - Prob. 2RQ
Ch. 20.3 - Prob. 3RQCh. 20.3 - Prob. 4RQCh. 20.4 - Prob. 1RQCh. 20.4 - Prob. 2RQCh. 20.4 - Prob. 3RQCh. 20 - Prob. 1SPACh. 20 - Prob. 2SPACh. 20 - Prob. 3SPACh. 20 - Prob. 4SPACh. 20 - Prob. 5SPACh. 20 - Prob. 6SPACh. 20 - Prob. 7APACh. 20 - Prob. 8APACh. 20 - Prob. 9APACh. 20 - Prob. 10APACh. 20 - Prob. 11APACh. 20 - Prob. 12APACh. 20 - Prob. 13APACh. 20 - Prob. 14APACh. 20 - Prob. 15APACh. 20 - Prob. 16APACh. 20 - Prob. 17APACh. 20 - Prob. 18APACh. 20 - Prob. 19APACh. 20 - Prob. 20APACh. 20 - Prob. 21APACh. 20 - Prob. 22APACh. 20 - Prob. 23APA
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- (a) A risk aversion strategy (b) A risk-taking strategy (c) The framing effectarrow_forwardJamal has autility function U=W1/2,where W is his wealth in millions of dollars and U is the utitlity he obtains from that wealth.Inthe final stage of a game show,the host offers offers Jamal a choice(A)$4 million dollar for sure,or (B) a gamble that pays $1 million with probability 0.6 and $9million with probability 0.4. a.Graph Jamal's utitility function.Is he risk averse?Explain. b.Does A or B offers Jamal a higher expected price?Explain your reasoning with appropriate calculations. c.Does A or B offer Jamal a higher expected utility? d.Should Jamal pick A or B? Why?arrow_forward2. Maria has $100. There is a 50% that she will lose all of it. Her utility as a functionof wealth is u(c) = √c. a. What is the maximum amount she would be willing to pay to fully insure againstthe 50% probability of the loss? b. Is she risk averse, risk loving, or risk neutral?arrow_forward
- Define risk aversion and give an example of a risk-averse person?arrow_forwardAccording to the text explain briefly how Risk Analysis helps the decision maker?arrow_forwardJamal has a utility function U = W1/2, where W is his wealth in millions of dollars and U is the utility he obtains from that wealth. In the final stage of a game show, the host offers Jamal a choice between (A) $4 million for sure, or (B) a gamble that pays $1 million with probability 0.6 and $9 million with probability 0.4. a. b. c. d. Graph Jamal’s utility function. Is he risk averse? Explain. (2+2) Does A or B offer Jamal a higher expected prize? Explain your reasoning with appropriate calculations. (1) Does A or B offer Jamal a higher expected utility? Explain your reasoning with calculations. (2) Should Jamal pick A or B? Why?arrow_forward
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