Let us consider a utility function: U(x) = ()/2x -1. (200sxs800) We have LiL2 where L1=(1, Y) and L2=(0.3, 450, 0.7,648). a. Determine the value of Y. b. Determine RP (Risk Premium) of L2.
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- Can you explain how Constant Relative Risk Aversion utility function should be understood and how it works mathematicallyYou 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.. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) √x . 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.
- Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = square root x . 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. 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.Let U(x)= x^(beta/2) denote an agent's utility function, where Beta > 0 is a parameter that defines the agent's attitude towards risk. Consider a gamble that pays a prize X = 10 with probability 0.2, a price X = 50 with probability 0.4 and a price X = 100 with probability 0.4. Compute the agentís expected utility for such gamble and find the value of Beta such that the agentis risk neutral? Suppose B= 1, what is the certainty equivalent of the gamble described above? What is the Arrow-Pratt measure of absolute risk aversion?
- . Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = square root x. 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?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.Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess and Lex both have the utility function c. Both could experience an adverse event that results in earnings of $0 per year. Tess has a 1% chance of experiencing an adverse event and Lex has a 12% chance of experiencing an adverse event. Tess and Lex are both aware of their risk of an adverse event. 1. Suppose the actuarially fair premium charge is 2600, Calculate Tess’ expected utility with full insurance if she is charged the premium. Round to two decimal places. 2. What is the premium that private insurance companies will charge for full insurance? Round to two decimal places. 3.Assume the social welfare function is the sum of the Tess’ and Lex’s utility functions. Select the correct statement regarding the explanation for what has happened in the private market and the role of social insurance. a.Adverse section has lead to market failure. The government could improve social welfare by…
- Suppose that you have two opportunities to invest $1M. The first will increase the amount invested by 50% with a probability of 0.6 or decrease it with a probability of 0.4. The second will increase it by 5% for certain. You wish to split the $1M between the two opportunities. Let x be the amount invested in the first opportunity with (1-x) invested in the second. Find the optimal value of x. Using expected value as the criterion (linear utility) Using the flowing utility function: u(x)=2.3 ln〖(1+4.5x)Please draw a utility function that exhibits risk-loving behavior for small gambles (low values)and risk-averse behavior for larger gambles (high value).Victoria founded a start-up several years ago, together with her Macedonian friends. At first, she was fairly poor and therefore very afraid of taking risks. Any negative shock could send the company into bankruptcy. Nowadays her business is thriving, stretching across several markets from Europe to Asia. Victoria no longer worries about taking monetary risks. In fact she enjoys a good gamble over horse races from time to time. How would you draw Victoria's utility function in a way that describes her changing taste for risk as her wealth increased? Please draw a graph and comment. Please do fast ASAP fast