Billy's income is equal to / = 100 and his utility function is U == 12, There is a 10% chance that he will be in an accident next year with his skateboard that will cause $70 worth of damage. Get the risk premium for Billy. b. An Insurance company offers a policy that will cover all the damages if an accident occurs Calculate the fair price for the insurance. %3D a.
Q: A farmer believes there is a 50–50 chance that the next growing season will be abnormally rainy. His…
A: Note:- Since we can only answer up to three subparts, we'll answer first three. Please repost the…
Q: Emily and Celeste both work at the same company and earn $10,000 per month. Assume all income is…
A: We are going to use Linear expected payoff model to answer this question.
Q: Mike's expected utility. (b) What is the maximum amount that Mike is willing to pay for auto insurar…
A: The expected utility theory is a famous idea in financial aspects that fills in as a kind of…
Q: Consider a consumer who is deciding to buy insurance for his beachfront house. Suppose the…
A:
Q: From utility theory, the demand for insurance depends on the level of risk aversion (i.e. how much…
A: Insurance: - it is an agreement between the policyholder and the insurer to pay a certain sum of…
Q: Diluted Happiness: Consider a relationship between a bartender and a customer. The bartender serves…
A: As while solving for part (a), Nash equilibria for customer is to not buy and Nash equilibria for…
Q: A consumer has utility u(I) = VI and income $1,000. When sick, the consumer must go to the doctor,…
A: U = I0.5 Income = $1,000 Visiting the doctor without insurance = $400 Probability of getting sick…
Q: The Allais Paradox suggests that expected utility fails because people tend to be risk-seeking over…
A: Option D All are correct Independence theorem of expected utility theory fails under Allais Paradox.…
Q: 1. Purchasing Insurance: Suppose that the household has the utility function u(c) = log(c). The…
A: There is probability and of states of accident.
Q: Good drivers have a 32% chance, and bad drivers have a 68% chance of getting into an accident. A car…
A: Given Probability that a bad driver have a chance of accident = 68% p(accident)=0.68q(not having…
Q: B đoes not. The index s measures how smoky the room is. It varies from S3D0, when there is no smoke…
A: Option e is correct
Q: Fin has $216 dollars in income and has the following preferences over income: U(1) =i Suppose he…
A: Fair bid= it is a bid for which the expected payoff is zero.
Q: Suppose a company offers a standard insurance contract with a premium (r) of $2,000 and a payout (q)…
A: Given that: Premium (r) = $2000Payout (q)= $10000Healthy state Income Ih = $70000Sick state Income…
Q: Demand for Insurance Find the Expected Utility for the Beneficiary (Baseball Pitcher) Determine the…
A: Given, Utility function The probability that pitcher would become injured = 0.1 Earning if he…
Q: The Allais Paradox suggests that expected utility fails because people tend to dislike losses more…
A: Option B All Options are correct Allais paradox discusses human irrationality Independence axiom of…
Q: ora has a monthly income of $20,736. Unfortunately, there is a chance that she will have an accident…
A: Leora has a monthly income of $20,736. If an Accident Happens then the cost is 10,736 Probability of…
Q: John is deciding whether to exert effort (e = 1) to avoid an accident at work or not exert any…
A: Given information Utility of money=I0.5 Total utility=I0.5-c(e) e=1 when exert effort at work and…
Q: Suppose Jessica has two choices: receive $12000 and 30 utils or take a gamble that has a 55% chance…
A: Utility denotes the satisfaction that the consumer derives when he/she purchases and uses a good or…
Q: A consumer has utility u(1) = Vī and income $1,000. When sick, the consumer must go to the doctor,…
A: U = I0.5 Income = $1,000 Visiting the doctor without insurance = $400 Probability of getting sick…
Q: A farmer can grow wheat, or potatoes, or both. If the weat her is good, an acre of land yields a…
A: The expected payoff of the choice is the weightage average of all possible payoffs using the…
Q: Economists define the ‘certainty equivalent’ of a risky stream of income as the amount of guaranteed…
A: Hi Student, Thanks for posting the question. As per the guideline, we are providing answer for the…
Q: Scenario 2 Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess…
A: Given that, all income of both of them spent on consumption (c) Yearly income of Lex =…
Q: George has utility function U (x, y) = min (0.5x, 5y) and income Y = 76. If the value is px = 2 and…
A: The indifference curve of the consumer shows the different combinations of two goods that provide…
Q: Uz Uz U4 Us 20 28 42 60 Income Currently the consumer has $60. If there is an accident their income…
A: Given a discrete random variable, and a function of that variable, the expected value of that random…
Q: The lecture mentions that diminishing marginal utility applies to the consumption of money as well…
A: “Since you have asked multiple questions, we will solve the first question for you. If you want any…
Q: John is deciding whether to exert effort (e = 1) to avoid an accident at work or not exert any…
A: Given information Utility of money=I0.5 Total utility=I0.5-c(e) e=1 when exert effort at work and…
Q: Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c). Tess and Lex both…
A: The total income of Tess = $40,000 The probability that Tess experiences adverse event (π) = 1% or…
Q: A farmer believes there is a 50-50 chance that the next growing season will be abnormally rainy. His…
A: “Since you have posted a question with multiple sub-parts, we will solve first three sub-parts for…
Q: Insurance Diagram Total Utility E U(W-L) B W-L P(W-L)+(1-p)W Expected If an insurance company…
A: * ANSWER :- By using given data the matching are given below
Q: QUESTION 5 A consumer has utility u (1)=√1 and income $1,600. The cost of going to the doctor is…
A: Utility function can be defined as the measure of welfare or satisfaction for any consumer as the…
Q: Use the figure shown to answer the questions below U, Uz U3 UA Us 60 Income 20 28 42 Currently the…
A: Given information Income=60 When accident income=20 Probability of accident=0.45
Q: Your Utility function of U = |5, where I is income. You receive an income of 1600 each week from…
A: The information is:- Utility function = i0.5 income = $1600 There is 50% chance of an accident that…
Q: Question 3 3a) If Jon purchases insurance for the pure premium, what is his utility? Jon now pays…
A: Yes, he is better of with the policy than without. The essence of taking an insurance policy is to…
Q: Mary's utility function for her asset position x is given by u(x) = 4"x^2+ 2*x^ 1/2. Currently.…
A: To answer this question, we should calculate the expected utility in presence of insurance and…
Q: 3. Demeter has 100 acres of land on which she can plant wheat or rice. The following table shows the…
A: Answer - Given in the question- Utility function over income U(w) = lnW Probability of wet growing…
Q: Persons A and B are roommates. Person A smokes and Person B does not. The index s measures how smoky…
A: It is a classic case of Coasian bargaining. in this case B has the legal right to have clean air. s…
Q: Brett is trying to decide between two insurance plans. The first plan has a $0 deductible, a 50%…
A: A deductible is the smallest amount that a person must pay before receiving insurance coverage.…
Q: Draw a utility function over income u( I) that describes a man who is a risk lover when his income…
A: In this question we have to find out the why utility function might reasonably with the help of the…
Q: Part 1 The Minister of Transport released its Festive season road accident statistics which shows…
A: Given, U(H)=H, where H=yearly income Probability of accident, p=8% Average cost of accident,…
Q: Who is most risk-averse? a-an individual with slightly diminishing marginal utility. b-all…
A: By risk aversion we mean conduct that represents an agent's reluctance to take certain risks even…
Q: Adam presently makes about $40,000 of interest income per year. He realizes that there is about a 5…
A: "Expected utility" is an economic term summarizing the utility that an entity or aggregate economy…
Q: Suppose your preferences can characterized by the simple utility function U = √C, where C is…
A: Given Utility wealth function: U=C where C is consumption. Chance of getting injured (p)= 0.1…
Q: An individual is offered a choice of either $50 or a lottery which may result in $0 or $100, each…
A: The utility function is given as follows; So, the utility of the person at first choice will be:
Q: Diluted Happiness: Consider a relationship between a bartender and a customer. The bartender serves…
A: The simultaneous game (or the stage game or the base game) has a unique Nash equilibrium where x = 0…
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
- 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) to avoid an accident at work or not exert any effort (e John is deciding whether to exert effort (e = 0). If e = 1, the probability of an accident is 0.5. If e = 0, the probability of an accident is 1. John's income without the accident is $100. In case of an accident, medical expenses will be $64. John utility of income is VI. The cost of effort, C(e), is 0 if effort is e = 0 and 1 if effort is e = 1. John's utility function is u(I, e) = Vī – C(e). (a) What are the expected utility values that John would face when he exerts effort and when he does not exert effort? Based on your calculations, should he exert effort? Briefly explain the intuition behind his decision in one or two sentences. Now suppose there is a risk neutral insurance company. Suppose the insurance company cannot monitor whether John exerts effort or not. The insurance company considers two plan contracts. Contract Plan A: Premium: p = $36. Payout in the event of accident: d = $64 Contract Plan B: Premium: p = $19.…1. 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 £10,00 A. Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. B. What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?
- 5. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = √√x. 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. b) What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?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 insuranceEconomics Shawn's consumption is subject to risk. With probability 0.75 he will enjoy 10000 in consumption, but with probability 0.25 he will have only 3600. His utility function for consumption is given by v(c) = Vc. -What is the expected value of Shawn's consumption? -What is his expected utility? -What is his certainty equivalent of having 10000 with probability 0.75 and 3600 with probability 0.25?
- . 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.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.2. Two individuals have the same income ($100,000), but different potential healthcare expenses. Person A's probability of having $80,000 in healthcare expenses is 0.5 percent. Person B's probability of having $800 in healthcare expenses is 50 percent. Assume your utility is U = VI where I is your income. Calculate each person's expected income and expected utility. Calculate each person's certainty equivalent. What does value of the certainty equivalent tell you about how much each person would be willing to insure against their loss?
- 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.5. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = √x. 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. I Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?Tom wants to avoid any accidents on the work floor of his factory. If an accident does occur, itwould cost him $500,000 in damages. Installing safety equipment would decrease the probabilityof an accident occurring from 20% to 10%. However, the equipment costs $20,000 to install.10. What is his expected loss after installing the safety equipmenta. $20,000b. $50,000c. $100,000d. $125,000