Consider an individual with an expected utility function of the form u(w) = √wwhere wrep- resents this individual’s wealth. This individual currently has wealth of $100. This individual faces a risk of losing $64 with a probability of (1/2). The maximum price that this individual would pay for insurance that covers the entire $64 loss is?

Consider an individual with an expected utility function of the form u(w) = √wwhere wrep- resents this individual’s wealth. This individual currently has wealth of $100. This individual faces a risk of losing $64 with a probability of (1/2). The maximum price that this individual would pay for insurance that covers the entire $64 loss is?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.1P

See similar textbooks

Similar questions

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.
Anita bought a new scooter for $500. She is deciding whether she should insureher scooter against theft. She has recently read in the news that one out of 10 scooters arestolen in her town. She can buy scooter theft insurance at the price of 12 cents per $1 ofinsurance. How much insurance will Anita buy if her utility function is U(C) = 2C + 100?
# 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?
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)
Michael lives on an island and owns a beach house worth $400,000. Of that, $100,000 is the cost of land and $300,000 is the cost of the structure. The probability that a hurricane destroys his house is 3percent (he will still own the land). Michael can purchase hurricane insurance at the price of $2for each $100 of coverage. 1. What is Michael’s contingent consumption bundle if Michael does not purchase insurance
. 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.
Your utility function is U = w, where W is your wealth. Your current wealth is $800. There is a 25% chance that you will suffer a loss of $600. You are: O Risk Averse O Risk seeking O Risk neutral O Risk encumbered
A risk-averse agent, Andy, has power utility of consumption with riskaversion coefficient γ = 0.5. While standing in line at the conveniencestore, Andy hears that the odds of winning the jackpot in a new statelottery game are 1 in 250. A lottery ticket costs $1. Assume his income isIt = $100. You can assume that there is only one jackpot prize awarded,and there is no chance it will be shared with another player. The lotterywill be drawn shortly after Andy buys the ticket, so you can ignore therole of discounting for time value. For simplicity, assume that ct+1 = 100even if Andy buys the ticket How large would the jackpot have to be in order for Andy to play thelottery? b) What is the fair (expected) value of the lottery with the jackpot youfound in (a)? What is the dollar amount of the risk premium that Andyrequires to play the lottery? Solve for the optimal number of lottery tickets that Andy would buyif the jackpot value were $10,000 (the ticket price, the odds of winning,and Andy’s…
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) 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?
Assume that Rosemarie has the following utility function: U(W) = W1/2. She is selling her homeand believes that the house will sell for $250,000 with probability ¼ and $122,500 withprobability ¾.a. What is her expected utility?b. What is the risk premium (P) Rosemarie would pay to avoid bearing this risk?
Albert owns a car worth MOP 50,000 which can get stolen with probability 1%. He could purchase coverage of the amount q e [0, 50000] at premium r = 0.05 dollars for each dollar covered. His utility function is U = log(Y) where Y is the level of wealth. a) Set up his maximization problem. b) How much insurance will he choose to buy? c) How much profits does the insurance company earn on insuring Albert? d) How much insurance will he buy if insurance companies charge an actuarially fair insurance rate?