Uncertainty The Utility function is U = W1/3Flood occurs with Probabilities=1/25. The Value of a house is $450,000 if no flood. Aftera flood, the value is $50,000. Cost of insurance is 10 cents per dollar.a. Calculate EU b. Calculate EV c. Calculate CE d. Calculate RP e. Calculate the variance and standard deviation f. How much insurance should you buy? Assume your are paying premium in all events.g. What is the expected profit of the insurance company? h. Calculate the coefficient of absolute and relative risk aversion UncertaintyThe Utility function is U = W!/3Flood occurs with Probabilities=1/25. The Value of a house is $450,000 if no flood. Aftera flood, the value is $50,000. Cost of insurance is 10 cents per dollar.a. Calculate EUb. Calculate EVc. Calculate CEd. Calculate RPe. Calculate the variance and standard deviationf. How much insurance should you buy? Assume your are paying premium in all events.g. What is the expected profit of the insurance company?h. Calculate the coefficient of absolute and relative risk aversion (

Expected utility is a weighted average of utilities of each of the possible events.

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Economics

Uncertainty The Utility function is U = W1/3 Flood occurs with Probabilities=1/25. The Value of a house is $450,000 if no flood. After a flood, the value is $50,000. Cost of insurance is 10 cents per dollar. a. Calculate EU b. Calculate EV c. Calculate CE

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter17: Making Decisions With Uncertainty

Section: Chapter Questions

Problem 17.2IP

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Concept explainers

Risk and Uncertainty

Uncertainty refers to a situation when there is one possible outcome of a decision but where the probability of occurrence of each particular outcome is not known or cannot be estimated.

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Uncertainty
The Utility function is U = W1/3
Flood occurs with Probabilities=1/25. The Value of a house is $450,000 if no flood. After
a flood, the value is $50,000. Cost of insurance is 10 cents per dollar.
a. Calculate EU
b. Calculate EV
c. Calculate CE
d. Calculate RP
e. Calculate the variance and standard deviation
f. How much insurance should you buy? Assume your are paying premium in all events.

g. What is the expected profit of the insurance company?
h. Calculate the coefficient of absolute and relative risk aversion

Uncertainty
The Utility function is U = W!/3
Flood occurs with Probabilities=1/25. The Value of a house is $450,000 if no flood. After
a flood, the value is $50,000. Cost of insurance is 10 cents per dollar.
a. Calculate EU
b. Calculate EV
c. Calculate CE
d. Calculate RP
e. Calculate the variance and standard deviation
f. How much insurance should you buy? Assume your are paying premium in all events.
g. What is the expected profit of the insurance company?
h. Calculate the coefficient of absolute and relative risk aversion (

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