(a) Is Bill risk-averse, risk-loving, or risk-neutral? Explain. (b) If Bill could buy insurance to completely avoid the loss, how much would he be willing to pay for this insurance at most? Explain.
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- Hello can any one help with this Economics question: A contractor spends Dollar 3,000 to prepare for a bid on a construction project which, after deducting manufacturing expenses and the cost of bidding, will yield a profit of dollar 25,000 if the bid is won. If the chance of winning the bid is ten per cent, compute his expected profit and state the likely decision on whether to bid or not to bid?# 4 Consider an individual with a utility function of the form u(w) = √w. The individual has an initial wealth of $4. He has two investments options available to him. He can eitffer keep his wealth in an interest-free account or he can take part in a particularly generous lottery that provides $12 with probability of 1/2 and $0 with probability 1/2. Assume that this person does not have to incur a cost if he decides to take part in the lottery. (a) Will this individual participate in the lottery? (b) Calculate this individual's certainty equivalent associated with the lottery. What is his risk premium?Your utility function is given by M1/2. You have $100 and are planning to invest in a venture where you can win or lose 50 with equal probability. Will you accept the venture? What is the minimum gain you need to make in the good scenario such that you will invest in the venture?
- A person has wealth of $500,000. In case of a flood her wealth will be reduced to $50,000. The probability of flooding is 1/10. The person can buy flood insurance at a cost of $0.10 for each $1 worth of coverage. Suppose that the satisfaction she derives from c dollars of wealth (or consumption) is given by u(c) = √c. Let C denote the contingent commodity dollars if there is a flood (horizontal axis) and CNF denote the contingent commodity dollars if there is no flood (vertical axis). 1 Determine the contingent consumption plan if she does not buy insurance. 2 Assume that the person has von Neumann-Morgenstern utility function on the contingent consumption plans. Write down the expected utility U(CF, CNF) and derive the MRS. 3 Solve for optimal (CF, CNF). To this end, first use the tangency condition (TC) to find the relation between the two contingent commodities (CF, CNF). Next, use (BC) to solve for their values. What is the optimal amount of insurance K the person will buy? (Note:…3. Sarah's current disposable income is £90,000. Suppose there's a 1% chance that Sarah's house may be flooded, and if it is, the cost of repairing it will be £80,000, reducing her disposable income to £10,000. Suppose also that her utility function of income M is: U = VM (a)Calculate Sarah's expected income and expected utility given the risk of flooding. (b)For her to take an insurance that fully insures her in the event of house flooding, Sarah would have to pay a price for such an insurance, which would reduce her disposable income. What would be the minimum certain disposable income required for Sarah to take an insurance that fully insures her in the event of house flooding? Explain your answer.2. Alice believes that her car would cost £12500 to replace if it was stolen or damaged. Based on crime statistics for the area she lives in, she believes that the probability of her car being stolen or damaged is 0.15. (i) Alice's utility function is given by U(w) = ln(w) for w > 0 and she as £35000 in the bank. Calculate how much Alice would be prepared to pay (in a single payment) to insure her car against theft or damage (ii) Repeat the calculation in the previous part but now assume Alice has £500000 in the bank.
- Microeconomics Wilfred’s expected utility function is px1^0.5+(1−p)x2^0.5, where p is the probability that he consumes x1 and 1 - p is the probability that he consumes x2. Wilfred is offered a choice between getting a sure payment of $Z or a lottery in which he receives $2500 with probability p = 0.4 and $3700 with probability 1 - p. Wilfred will choose the sure payment if Z > CE and the lottery if Z < CE, where the value of CE is equal to ___ (please round your final answer to two decimal places if necessary)A person has wealth of $500,000. In case of a flood her wealth will be reduced to $50,000. The probability of flooding is 1/10. The person can buy flood insurance at a cost of $0.10 for each $1 worth of coverage. Suppose that the satisfaction she derives from c dollars of wealth (or consumption) is given by u(c) = √c. Let CF denote the contingent commodity dollars if there is a flood (horizontal axis) and CNF denote the contingent commodity dollars if there is no flood (vertical axis). (a) Determine the contingent consumption plan if she does not buy insurance. (b) Determine the contingent consumption plan if she buys insurance $K. (c) Use your answer in (b) to eliminate K and construct the budget constraint (BC) that gives the feasible contingent consumption plans for different amounts of insurance K. Determine the slope of budget line (both graphically and by forming the price ratio).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). 1. Taking the bet would reduce his expected utility. 2. Taking the bet would leave his expected utility unchanged. 3. Taking the bet would increase his expected utility. 4. There is not enough information to determine whether taking the bet would increase or decrease his expected utility. 5. The information given in the problem is self-contradictory.
- 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.A has a utility of money function given by U(y) = y. 1 / 3 All of A's wealth is in his land and his house; the total value is $1,000,000. With probability 0.4, the house will burn down within the year, and A's remaining wealth will be only the value of the land, which is $28,900. Using at least half page for your diagram, sketch A's indifference curve given the situation above. Put income in the bad state (loss occurs) on the horizontal axis. Identify the following in your diagram: a. the expected value of the gamble Jackson faces b, A's certainty equivalent of the gamble c. the amount Jackson would be charged for actuarially fair full insurance.Assume that your utility has a natural log function U(W)=ln(W), which is a concave function. Your car is worth $10,000 and your total wealth is $20,000 including the car. There is a 5% chance that a major accident occurs and you have a total loss of $10,000; a 10% chance that a minor accident occurs and you have a loss of $500; 85% chance you will not have any accident. Given these assumptions, how much are you willing to pay for an insurance that provides full coverage against car accidents? Thank you. Regards, Jim Carroll