Assume that Rosemarie has the following utility function: U(W) = W1/2. She is selling her home and believes that the house will sell for $250,000 with probability ¼ and $122,500 with probability ¾. a. What is her expected utility? b. What is the risk premium (P) Rosemarie would pay to avoid bearing this risk?
Assume that Rosemarie has the following utility function: U(W) = W1/2. She is selling her home and believes that the house will sell for $250,000 with probability ¼ and $122,500 with probability ¾. a. What is her expected utility? b. What is the risk premium (P) Rosemarie would pay to avoid bearing this risk?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Assume that Rosemarie has the following utility function: U(W) = W1/2. She is selling her home
and believes that the house will sell for $250,000 with probability ¼ and $122,500 with
probability ¾.
a. What is her expected utility?
b. What is the risk premium (P) Rosemarie would pay to avoid bearing this risk?
and believes that the house will sell for $250,000 with probability ¼ and $122,500 with
probability ¾.
a. What is her expected utility?
b. What is the risk premium (P) Rosemarie would pay to avoid bearing this risk?
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