Economics for Healthcare Managers, Third Edition
3rd Edition
ISBN: 9781567936766
Author: Robert H. Lee
Publisher: Health Administration Press
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Question
Chapter 4, Problem 8E
To determine
Check whether the person is risk averse or not.
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Betting on Events
Suppose there is a 75% chance of rain tomorrow. You are offered a "contract" that will pay
you $1 if it rains tomorrow and $0 if it doesn't.
Suppose there is a 75% chance of rain tomorrow. You are offered a "contract" that will pay
you $1 if it rains tomorrow and $0 if it doesn't.
Question 4
What is the expected (average) value of the contract's payout in dollars?
What does it mean to be Risk Averse?
John owns and runs a food truck, which he expects to increase his wealth to $40,000 this year. John knows that every year, there
is a 20% chance that his truck will be firebombed by one of his ruthless food truck competitors. If this happens, he will face a bill
of $10,000 in repairs and lost income. John can choose to get insurance to cover all repair costs and lost wealth. Use this
information and the information in the table and graph to answer the questions.
Total utility
Wealth
Total utility (utils)
730
1000
$32,000
900
$34,000
755
800
700
$36,000
785
600
792
500
$38,000
400
300
200
100
0
$5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000
Wealth
What is John's expected wealth?
expected wealth: $
What is the price for John's insurance?
price of insurance: $
What is John's expected utility without insurance?
expected utility: 730
If John chooses to pay the insurance policy price, what would
be his total utility?
total utility:
1030
42000
10000
utils
utils
Chapter 4 Solutions
Economics for Healthcare Managers, Third Edition
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Similar questions
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- A risk-averse manager is considering a project that will cost £100. There is a 10 percent chance the project will generate revenues of £100, an 80 percent chance it will yield revenues of £50, and a 10 percent chance it will yield revenues of £500. Should the manager adopt the project? Explain. What will a risk-neutral and risk-loving manager do in the same situation?arrow_forwardIn the final round of a TV game show, contestants have a chance to increase their current winnings of $1 million dollars to $2 million dollars. If they are wrong, their prize is decreased to $500,000. The contestant thinks his guess will be right 50% of the time. Should he play? What is the lowest probability of a correct guess that would make playing profitable?arrow_forwardIf it is impossible to acquire sufficient information to make an informed decision, what can be the least risky option to take? Using gut feelings Not doing anything Do something because something is always better than nothing. Let someone else make the decision.arrow_forward
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