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- 27 of 38 Larissa experiences a diminishing marginal utility of income. Because of this we know that Larissa's attitude toward risk is that of O A. risk neutral. O B. risk loving. O C. risk averse. O D. risk caring. Unsure7. Principal-Agent II A risk-neutral principal can hire a risk-averse agent to undertake a project. There are two possible outcomes for the gross profit of the principal, TL There are also two possible effort levels that the agent can exert, e = 0 or 1; if e = 0, the probability of TH is only 1/3, but if e = 1, the probability of TH increases to 2/3. 20 and TH = 50. The agent's utility from receiving a wage wand exerting effort e is Vw – e, and the agent has a reservation utility of ū = 2. (a) Assume that effort is observable. What wage will the principal offer if she wants to induce low effort? What wage will she offer if she wants to induce high effort? What contract is optimal for the principal?2- Who is risk aversion?
- a. Define Compensating Variation (CV) and Equivalent Variation and show how they are related. Which one is the appropriate measure of the "value of life" in a risky project? b. Define CV, 1¹2to be the compensating variation for a movement from state 1 to risky state 2 for individual ; If a worker might die in state 2 what we expect the value of CV 12to be infinite, so no risky project entailing the possibility of death would be undertaken. How do you resolve this apparent dilemma ?You and a coworker are assigned a team project on which your likelihood or a promotion will be decidedon. It is now the night before the project is due and neither has yet to start it. You both want toreceive a promotion next year, but you both also want to go to your company’s holiday party that night.Each of you wants to maximize his or her own happiness (likelihood of a promotion and mingling withyour colleagues “on the company’s dime”). If you both work, you deliver an outstanding presentation.If you both go to the party, your presentation is mediocre. If one parties and the other works, yourpresentation is above average. Partying increases happiness by 25 units. Working on the project addszero units to happiness. Happiness is also affected by your chance of a promotion, which is depends on howgood your project is. An outstanding presentation gives 40 units of happiness to each of you; an aboveaverage presentation gives 30 units of happiness; a mediocre presentation gives 10 units…Many decision problems have the following simplestructure. A decision maker has two possible decisions, 1 and 2. If decision 1 is made, a sure cost of c isincurred. If decision 2 is made, there are two possibleoutcomes, with costs c1 and c2 and probabilities p and1 2 p. We assume that c1 , c , c2. The idea is thatdecision 1, the riskless decision, has a moderate cost,whereas decision 2, the risky decision, has a low costc1 or a high cost c2.a. Calculate the expected cost from the riskydecision.b. List as many scenarios as you can think of thathave this structure. (Here’s an example to get youstarted. Think of insurance, where you pay a surepremium to avoid a large possible loss.) For eachof these scenarios, indicate whether you wouldbase your decision on EMV or on expected utility
- Using the expected-utility theory define risk averse, risk-loving and risk neutral individuals. Give examples.Economics 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?Assuming you are risk neutral, frast answer the folowing two questions about your preferences: Scenario A: You are given $5.000 and offered a choice beheeen receiving an extra $2.500 with certainty or fipping a coin and getting $5.000 t heads or S0 if tain. Which option do you prefer? A The certain $2.500 is more valuable than the uncertain $5.000, I would choose the $2.500 Both options have identical payofs, so l am indiferent between the two options. The possibility of the 5.000 payoff is more valuable to me than the oertain $2.500, I chocse to fio a coin Scenario B. You are given $10.000 f you wil make the following choice: retum $2.500 or fip a coin and retum $5.000 heads and so tai. Which opton do you prefer? A The certain los of S$2.500 is more paintu than the possible loss of $5,000, I choose to fip a coin. OR The ponsibility of the los of $5.000 is more paintul to me than the certain los of $2.500, I would choose the $2.500 certan loss re Both options have identical payoffs, so…
- Who is most risk-averse? a-an individual with slightly diminishing marginal utility. b-all individuals are equally risk-averse. c-an individual with rapidly diminishing marginal utility. d-an individual who does not experience diminishing marginal utility.he person who requires high return regardles bf nsk s called (a There 1s no difference between return d riok preference. Drish averse O risk neutral (indifferent) (ay risk seeking1. A dealer decides to sell a rare book by means of an English auction with a reservation price of 54. There are two bidders. The dealer believes that there are only three possible values, 90, 54, and 45, that each bidder’s willingness to pay might take. Each bidder has a probability of 1/3 of having each of these willingnesses to pay, and the probabilities for each of the two bidders are independent of the other’s valuation. Assuming that the two bidders bid rationally and do not collude, the dealer’s expected revenue is approximately ______. 2. A seller knows that there are two bidders for the object he is selling. He believes that with probability 1/2, one has a buyer value of 5 and the other has a buyer value of 10 and with probability 1/2, one has a buyer value of 8 and the other has a buyer value of 15. He knows that bidders will want to buy the object so long as they can get it for their buyer value or less. He sells it in an English auction with a reserve price which he must…