5. Consider a decision-maker who expects to have a car accident with chance ; if this occurs, he will incur $L in damages. He can purchase as much auto insurance, q, as he likes, at a price of p per dollar of coverage: this means that if he pays pq upfront (as the insurance premium), he'll receive a payment of q from the insurance company if an accident occurs. (a) Write out his expected utility from purchasing insurance level q, assuming a utility-of- wealth function u(w) and initial wealth wo. 1 (b) Show that the optimal level of insurance, q, solves u' (wo - L+ (1 − p)q)) u' (wo - pq) P(1 - π) π(1-P) (c) Now assume that u(w) = 1- e-aw, where a > 0 (this is known as a "CARA", or "constant absolute risk aversion", utility function; a parametrizes risk aversion). Solve explicitly for the optimal insurance, and show that it does not depend on wealth.
Q: Use the labour market information given below to answer the following questions: * Total opulation =…
A: The objective of the question is to calculate the number of individuals not in the labour force…
Q: 1. What is the equilibrium price and quantity? 2. Suppose the government imposes a tax of $1.00 on…
A: Since you have posted a question with multiple sub-parts, we will provide the solution to only the…
Q: True or False: Inelastic demand means that a change in price will result in a proportionally smaller…
A: Price elasticity of demand refers to the percentage change in the quantity demanded of a goods or…
Q: Discuss the Millennium Development Goal and HIV/AIDs, malaria, it's achievement with respect to…
A: MDG stands for Millennium Development Goals. These have been 8 worldwide development goals set up by…
Q: The demand curve and supply Curve for one-year discount bonds with a face value of $1,050 are…
A: The demand equation for the bond market is given as The supply equation for the bond market is given…
Q: The offer curves of Nation 1 and Nation 2 are shown in Fig. 4.4 Figure 4.4 Nation 1 Ps Nation 2…
A: The offer curve plays an important role in the branch of international trade as it helps in the…
Q: Give me proper answer with calculation otherwise i give downvote Note:- Please avoid using ChatGPT…
A: The objective of the question is to calculate the duration gap of Rivendell National Bank (RNB). The…
Q: 0 1 2 3 4 5 6 7 8 9 10 $30 20 30 40 50 60 70 80 90 100 $230 125.00 93.33 80.00 74.00 71.67 71.43…
A: A perfectly competitive firm is a price taker, this implies a competitive firm takes the price…
Q: 1. Consider two duopolists who each have a constant marginal cost c1=c2= 3 and face inverse demand…
A: When two businesses control a sizable share of the market and dominate the production or sale of a…
Q: A consumer has $100 to spend on craft beer and Schweinefleischaft (pork shanks). Suppose craft beer…
A: Consumer behavior refers to the study of how individuals, groups, or organizations select, buy, use,…
Q: 1. Study Questions and Problems #1 Complete the following statement explaining the relationship…
A: Budget Deficit: A budget deficit occurs when a government's expenditures exceed its revenue during a…
Q: Assume that Sophia has $1000 per month to spend between dinners at a Thairestaurant and evenings at…
A: Overall, the budget line shows the feasible combinations of two commodities that can be bought with…
Q: A government-funded wind-based electric power generation company in the southern part of the country…
A: The Conventional Benefit-Cost Ratio (B/C ratio) is a financial metric used to calculate the…
Q: Suppose gold (G) and silver (S) are substitutes for each other because both serve as hedges against…
A: The equilibrium refers to economic condition where the both demand and supply forces are equal.…
Q: Country Report for China - Membership in trades, economic or political organizations - Fiscal…
A: After the evolution of the classical school of thought international trade got important. Various…
Q: 1. What are the tools that a country can use to restrict international trade? 2. Explain the…
A: International trade:International trade means buying and selling goods and services from outside the…
Q: Cobb Douglas Pf is q=16k^(1/4)l^(3/4) Solve for sigma. Does it depend on the k to l ratio?
A: In the Cobb-Douglas production function q=A⋅Kα⋅Lβ, where q represents output, K is the quantity of…
Q: Two firms compete on price every year. The inverse demand function each firm faces depends on which…
A: Game theory in duopoly impacts the strategic interplay between two firms, influencing pricing,…
Q: Each extra worker produces an extra unit of output up to 6 workers. After 6, no additional output is…
A: The total product of labor (TP) is the total quantity of a good or a service that is produced by all…
Q: 5. A monopoly produces songs and sell them in CDs. It has a constant marginal and average cost of…
A: When a single manufacturer or seller prevents other viable competitors from offering the same…
Q: Problem 1Advanced Electronics (AE) is a computer chip manufacturer. It has monthly fixed costs of…
A: “Since you have posted multiple questions, we will provide the solution only to the first question…
Q: The student chapter of the American Society of Mechanical Engineers is planning a six-day trip to…
A: The break-even point refers to a point where the total cost of a firm is equal to the total revenue…
Q: If the government wants to raise tax revenue, which of the following items are good candidates for…
A: Taxes play a crucial role in financing government operations, addressing social and economic…
Q: small open economy
A: A small open economy refers to a country that engages in international alternate but has pretty…
Q: There are a range of property rights regimes that are possible in agriculture. These range from a…
A: A mathematical equation known as a production function establishes the relationship between the…
Q: ASAP pls Discuss the possible substitution effect and the income effect of an increase in income on…
A: In general, income often is considered as the amount of money that an individual or entity get as a…
Q: Valvoline expects the cost of tubing for 6-inch valves to increase by $3 every 3 months. if the cost…
A: Present worth methodEvery business faces different investment opportunities. Before taking any…
Q: 17. if rr = 1000, c = 2000, ER = 4000, DD = 10000, y = 80000, price = 1.5, rr or h = 0.10, by use…
A: Money is vital in the macroeconomy due to the fact that it acts as an instrument of trade, enabling…
Q: Consider an international trade model consisting of three countries X, Y, and Z. Suppose X uses…
A: In the Leontief model, the economy is divided into various sectors or industries, each producing…
Q: Hand written solutions and AI solutions are strictly prohibited
A: The objective of the question is to create a mathematical model that represents the relationship…
Q: 6. If the probability of illness is the expected wealth equals: a. $12,500. b. $15,000. c. $17,500.…
A: A want satisfying power of a commodity or service is known as its utility. Utility is a significant…
Q: LU 15 10 7.50 5 2.50 100 200 200 D 300 400 300 400 500 600 700 800 900 Quantity (hours of tutoring…
A: Price ceiling refers to the maximum price level that the government imposes on the firms while…
Q: With rregards to Modern Theories of Interest Rates and Their Application to the Caribbean Region,…
A: The essential concern spins around understanding how current theories of interest rates make sense…
Q: How much must you deposit each year into your retirement account starting now and continuing through…
A: A deposit starting from current period goes through 10 years. The deposit takes place if $75000…
Q: The graph shows the supply and demand for the United Kingdom's currency, the pound sterling, where…
A: The currency market, also called as the foreign exchange (forex or FX) market, is a global…
Q: GTive me p Note:- Please avoid using ChatGPT and refrain from providing handwritten solutions;…
A: The objective of the question is to calculate the Consumer Price Index (CPI) for the year 2011,…
Q: Identify two major economic strengths and two major weaknesses for your selected country (India).…
A: Economic strength shows the robustness of an economy. There are various factors that can contribute…
Q: 1. The graph below illustrates the inverse demand functions (demand curves) D1 and D2 for which the…
A: Price Elasticity of Demand is the rate of change that the quantity demanded of a good goes through…
Q: What is the value of the deadweight loss created by a perfectly competitive industry? Assume there…
A: The objective of the question is to determine the value of the deadweight loss in a perfectly…
Q: The entry of a private entity into the water utility business has brought changes in operational…
A: The demand equation for two periods is provided. The two periods include the peak period and the…
Q: Initially, a market is in equilibrium, but then both demand and supply decrease. Suppose that the…
A: This can be defined as a concept that shows the total demand for the products and services in a…
Q: 8 6 4 2 O 1 Investment is $ Private saving is $ following questions. PSLF billion. SLF 175 350 525…
A: Loanable funds are defined as the theory for determining the rate of interest in the market. The…
Q: Suppose the supply of a good is given by the quantity (Q) is measured in millions of units The…
A: A market is an environment or system in which producers and consumers interact to trade products and…
Q: Two alternative investments are being considered. Design A has an initial cost of $3 million and…
A: To compare the rate of return of Design B to Design A, we need to calculate the net present value…
Q: (a) Suppose in a competitive market, the market demand curve for salt is infinitelyinelastic. What…
A: a) The given specific tax would increase the price paid by consumers by the exact size of the taxb)…
Q: A firm produces output according to the following production function: Q = F (K, L) = 4K + 8L (a)…
A: The physical output of a production process and the physical inputs or elements of production…
Q: If an initial investment of $10000 is made in Year 0 at an interest rate of 7%, solve for the value…
A: $3,107.Explanation:Let's calculate the Net Present Value (NPV) for this investment. The NPV…
Q: Q2: Firms A and B are two firms supplying products in two separate differentiated goods markets.…
A: Cost can be defined as a concept that shows the amount of expenditure and any other sacrifice such…
Q: Bill O'Really of OX News observed that poultry (chicken and turkey) consumption in the US increased…
A: Supply refers to the quantity of a product or service that producers are willing to offer for sale…
Q: Which of the following situations would likely make the dead weight loss of a binding price floor…
A: The government imposes minimum and maximum price to protect the consumer and producers in a rise in…
Step by step
Solved in 3 steps with 2 images
- 6) Leia has $11,000 and she wants to invest in financial market. There are two types of assets. The first one guarantees 0.1 percent return next year. The second one is a risky asset which will yield 0.5 percent return in good times and 0.4 percent of loss in bad times. Suppose the chance of good and bad times is half-half and Leia's utility function is U(Y) = Y 0.5 %3D a). What is the expected utility if she invest in the first asset? b). What is the expected utility if she invest in the second asset? Will Leia chooses the first or the second asset? c). Suppose that Leia can purchase a financial insurance which cost her $100 and cover all her lost when bad times happen. Will she purchase this insurance?4) Luke is planning an around-the-world trip on which he plans to spend $10,000. The utility from the trip is a function of how much she spends on it (Y ), given by U(Y) = InY a). If there is a 25 percent probability that Luke will lose $1000 of his cash on the trip, what is the trip's expected utility. b). Suppose that Luke can buy insurance to fully against losing the $1,000 with a actuarially fair insurance. What is his expected utility if he purchase this insurance. Will he purchase the insurance? c). Now suppose utility function is U(Y) = Y/1000 What is his expected utility if he purchase the insurance in b). Will he purchase the insurance?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.
- 7. Suppose the only game in town involves flipping a fair coin (so Heads and Tails are equally likely), with a $x bet. If Heads comes up, the payoff is $0.9x; if Tails comes up, you lose the $x. You have $10,000, and must win at least $5,000 by tomorrow morning to pay off a debt to a mean dude. a. Compute the likelihood of winning at least $5000 by making a single bet of $10,000. b. Compute the likelihood of winning at least $1000 by playing the game 10,0000 times and betting a dollar each time. What is the likelihood of not losing money? Message learned?Utility Theory You live in an area that has a possibility of incurring a massive earthquake, so you are considering buyingearthquake insurance on your home at an annual cost of $180. The probability of an earthquake damagingyour home during one year is 0.001. If this happens, you estimate that the cost of the damage (fully coveredby earthquake insurance) will be $160,000. Your total assets (including your home) are worth $250,000. A. Apply Bayes’ decision rule to determine which alternative (take the insurance or not) maximizes yourexpected assets after one year.1. Jerry has wealth of $60 and derives utility from this according to the utility function U(w) = 1 - -, Where w is his wealth. Jerry now finds a lottery ticket (whose drawing is tomorrow) that offers a 50% chance of winning $5. (a) What is the expected value of the lottery ticket? (b) What is the minimum amount for which Jerry would be willing-to-sell the ticket? (c) Which is bigger, your answer to (a) or (b)? Use a clearly labelled diagram to explain why. (d) If he does not sell the ticket, what is Jerry's cost of risk?
- 4. Marvin is given a number of choices between various lotteries where the possible outcomes include a vacation, a motorbike, a pair of shoes and a round of applause, or X = {v,m, s, a}. It is known that, according to Marvin's preferences, v > m > s > a. In addition, he claims he would be indifferent between the motorbike and a lottery that results in a vacation with probability 0.4 and a pair of shoes with probability 0.6, and he would furthermore be indifferent between a pair of shoes and a lottery that results in a motorbike with probability 0.5 and a round of applause with probability 0.5. Marvin has a utility function u: X → R (in other words u maps each element in X to a real number) and he in an expected utility maximiser (in other words his preferences conform to the axioms G1 to G6). 4.1. Assuming Marvin's claims about indifference are correct, derive u(m) and u(s) in terms of u(v) and u(a). 4.2. Von Neumann-Morgenstern utility functions are only unique up to positive affine…3. Further questions Now, imagine that Port Chester decides to crack down on motorists who park illegally by increasing the number of officers issuing parking tickets (thus, raising the probability of a ticket). If the cost of a ticket is $100, and the opportunity cost for the average driver of searching for parking is $12, which of the following probabilities would make the average person stop parking illegally? Assume that people will not park illegally if the expected value of doing so is negative. Check all that apply. 13% 21% 9% 10% Alternatively, the city could hold the number of officers constant and discourage parking violations by raising the fine for illegal parking. Suppose the average probability of getting caught for parking illegally is currently 10% citywide, and the average opportunity cost of parking is, again, $12. The fine that would make the average person indifferent between searching for parking and parking illegally is 5 park illegally if the expected value of…Becky is deciding whether to purchase an insurance for her home againtst burglary. the payoff for her is shown as follow: Net worth of her Net worth of her home: $ 20000 burglary(10%) Net worth of her Net worth of her home: $50000 burglary (90%) The insueance would cover all the loss from burlary and the insurance fee is $8000. Her utility funtion is given as u=w ^0.3 Should Beck purchase the insurance Explain.
- a Suppose you are given a choice between thefollowing options:A1: Win $30 for sureA2: 80% chance of winning $45 and 20% chance ofA2: winning nothing B1: 25% chance of winning $30B2: 20% chance of winning $45Most people prefer A1 to A2 and B2 to B1. Explainwhy this behavior violates the assumption that decisionmakers maximize expected utility.b Now suppose you play the following game: You havea 75% chance of winning nothing and a 25% chance ofplaying the second stage of the game. If you reach thesecond stage, you have a choice of two options (C1 andC2), but your choice must be made now, before youreach the second stage.C1: Win $30 for sureC2: 80% chance of winning $45 13.5 Bayes’ Rule and Decision Trees 767Most people choose C1 over C2 and B2 to B1 (from part(a)). Explain why this again violates the assumption ofexpected utility maximization. Tversky and Kahneman(1981) speculate that most people are attracted to thesure $30 in the second stage, even though the secondstage may never be…1. A woman with current wealth X has the opportunity to bet an amount on the occurrence of an event that she knows will occur with probability P. If she wagers W, she will received 2W, if the event occur and o if it does not. Assume that the Bernoulli utility function takes the form u(x) = -e-rx with r>0. How much should she wager? Does her utility function exhibit CARA, DARA, IARA?3. Consider a home energy storage (battery) system that can store up to 2 units of energy. At every time step, there is a demand for energy in the home which is drawn from 0,1,2 units with equal probability independent of the demands in the previous time steps. At every point in time, you have to satisfy the demand either by discharging the needed energy from the battery or purchasing power from the grid (or a combination of the two). You could also choose to purchase power from the grid to charge your battery. The grid energy price is either H(igh) or L(ow) according to a Markov chain (Price moves from H to L with probability p, and from L to H with probability q). (a) Model the decision making as an infinite horizon MDP where the objective is to minimize the discounted cost of energy purchased over an infinite horizon. (b) Write down a policy a of your choosing. Perform two steps of the operator T, for your policy, followed by one step of T..