If a risk-neutral individual owns a home worth $200,000 and there is a three percent chance the home will be destroyed by fire in the next year, then we know 15. that: a) He is willing to pay much more than $6,000 for full cover. b) He is willing to pay much less than $6,000 for full cover. c) He is willing to pay at most $6,000 for full cover. d) None of the above are correct. e) All of the above are correct.
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- If a risk‐neutral individual owns a home worth $200,000 and there is a three percent chance the home will be destroyed by fire in the next year, then we know that:a) He is willing to pay much more than $6,000 for full cover.b) He is willing to pay much less than $6,000 for full cover.c) He is willing to pay at most $6,000 for full cover.d) None of the above are correct.e) All of the above are correct.3. Suppose that Jon Snow's utility function is given by U(I)=501 where I represents annual income in thousands of dollars. a. Is Jon risk loving, risk neutral, or risk averse? Explain b. Suppose that Jon is currently earning an income of $1000 and can earn that income next year with certainty. He is offered a chance to take a new night watch job that offers a 0.25 probability of earning $2000 and a 0.75 probability of earning $500. Should he take the new night watch job?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.
- 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?3. Han Solo is delivering illicit cargo to the rebel forces on Alderaan, a planet blockaded by the galactic empire. In order to deliver his cargo successfully, Han Solo must pass 2 checkpoints, each of which will not detect his cargo with probability q. If Han Solos cargo is detected at one or more checkpoints, then his final wealth is 0. If Han Solo passes both checkpoints undetected, then his final wealth is 100. Han Solo's risk- preference is described by Bernoulli utility function Vw. Thus Han Solo's wealth is described by a lottery: 100 with probability q?, 0 with probability 1- q. (a) What is Han Solo's expected utility? Suppose an Imperial officer makes an offer to Han Solo. The officer will reduce number of checkpoints from 2 to 1, but if Han Solo gets through, he has to pay k to the officer. If Han Solo gets caught, his payoff is 0. If he agrees to this arrangement, then his final wealth is described by a lottery: 100 – k with probability q, 0 with probability 1- q. (b) What…4. You wish to hire Ricky to manage your Dallas operations. The profits from the operations depend partially on how hard Ricky works, as follows. Probabilities Profit $10,000 Profit= $50,000 Lazy worker 40% 60% 20% Hard worker 80% If Ricky is lazy, he will surf the Internet all day, and he views this as a zero cost opportunity. However, Ricky would view working hard as a "personal cost" valued at $1,000. What fixed percentage of the profits should you offer Ricky? Assume Ricky only cares about his expected payment less any "personal cost."
- 2. Ronald has $18,000. But he is forced to bet it on the flip of a fair coin. If he wins he has $36,000. If he loses he has nothing. Ronald's expected utility function is 0.5x0.5 + 0.5y0.5, where x is his wealth if heads comes up and y is his wealth if tails comes up. What safe income would make him exactly as well off as this bet?17. Suppose a risk-neutral power plant needs 10,000 tons of coal for its operations next month. It is uncertain about the future price of coal. Today it sells for $60 a ton but next month it could be $50 or $70 (with equal probability). How much would the power plant be willing to pay today for an option to buy a ton of coal next month at today's price? (Ignore discounting over the short period of a month.) а. 5 b. 4 с. 3 d. NOTE: I KNOW THAT THE ANSWER IS (A), BUT PLEASE INCLUDE ALL THE STEPS HOW TO SOLVE THE PROBLEM BECAUSE I NEED TO PRACTICE. THANK YOU.For each of the following scenarios, determine whether the decision maker is risk neutral, risk averse, or risk loving. a. A manager prefers a 20 percent chance of receiving $1,400 and an 80 percent chance of receiving $500 to receiving $680 for sure. b. A shareholder prefers receiving $920 with certainty to an 80 percent chance of receiving $1,100 and a 20 percent chance of receiving $200. c. A consumer is indifferent between receiving $1,360 for sure and a lottery that pays $2,000 with a 60 percent probability and $400 with a 40 percent probability.
- 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 insurance2. 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.If a risk-averse individual owns a home worth $100,000, and that individual is willing to pay $1,000 for an annual fire insurance policy that covers the entire loss in the event of a fire, then we know that?