Risk aversion is best explained by a. Timidity b. Increasing marginal utility of income c. Constant marginal utility of income Decreasing marginal utility of income
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Risk aversion is best explained by a. Timidity b. Increasing c. Constant marginal utility of income Decreasing marginal utility of income |
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A Risk Lover prefers the expected utility of wealth to the utility of the expected value of wealth. a. TRUE. It is because a risk lover has a convex utility function b. FALSE. It is because a risk lover has a concave utility function
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- Jamal has a utility function 1/2 U W5 , where W is hiswealth in millions of dollars and U is the utility heobtains from that wealth. In the final stage of agame show, the host offers Jamal a choice between(A) $4 million for sure and (B) a gamble that pays$1 million with probability 0.6 and $9 million withprobability 0.4.a. Graph Jamal’s utility function. Is he risk averse?Explain.b. Does A or B offer Jamal the higher expectedprize? Explain your reasoning with appropriatecalculations. (Hint: The expected value of arandom variable is the weighted average of thepossible outcomes, where the probabilities arethe weights.)c. Does A or B offer Jamal the higher expectedutility? Again, show your calculations.d. Should Jamal pick A or B? Why?A. From the graph below explain how an insurance plan which provides the buyer a $15,000 wealth level, regardless of any uncertain event, is a good deal for the buyer? In other words, what does the distance between points D’ and C’ represent? Note we are referring to D prime, not D. B. Considering the graph below, can you explain the difference between expected utility and certainty utility?Jamal has a utility function U= W1/2 where Wis his wealth in millions of 'dollars and Uis the utility he obtains from that wealth. In the final stage of a game show, the host offers Jamal a choice between (A) $4 million for sure, or (B) a gamble that pays $1million with a probability of 0.6 and $9 million with a probability of 0.4. a. Graph Jamal's utility function. Is he risk-averse? Explain. b. Does A or B offer, Jamal, a higher expected price? Explain your reasoning with appropriate calculations. (Hint: The expected value of a random variable is the weighted average of the possible outcomes, where the probabilities are the weights.) c. Does A or B offer Jamal a higher expected utility? Again, show your calculations. d. Should Jamal pick A or B? Why?
- Draw a utility function over income u(I) that describes a man who is a risk lover when his income is low but risk averse when his income is high. 1.) Using the 3-point curved line drawing tool, draw the low income portion of his utility function. Label it UL. 2.) Using the 3-point curved line drawing tool, draw the high income portion of his utility function. Label it UH- Carefully follow the instructions above, and only draw the required objects. 500- 450- 400- 350- 300- 250- 200- 150- 100- 50- 0- Utility 20.000 40.000 60,000 80,000 Income 100,000Khalid has a utility function U = W1/2, where W is his wealth in millions of dollarsand U is the utility he obtains from the wealth. In a game show, the host offershim a choice between (A) $4 million for sure, or (B) a gamble that pays $1million with probability 0.6 and $9 million with probability 0.4.i. Graph Khalid’s utility function with the help of above utility function. Ishe risk lover? Explain. ii. Does A or B choice offer Khalid a higher expected prize? Explain yourreasoning with appropriate calculations. iii. Does A or B offer Khalid a higher expected utility? Again, show yourcalculations. iv. Should Jamal pick A or B choice? Why?3. In the second example, we will consider the case where the insurance contract involves a deductible this is an amount which is deducted from the final pay-out of the insurance firm in the case of a loss. In other words, the consumer bears this part of the loss herself. For this problem, assume a risk-averse, expected utility maximizing consumer with initial wealth wo who faces a potential loss of size L which will occur with probability p. Her utility-of-final-wealth function is denoted by u(.). Suppose that the consumer can purchase insurance coverage of C > 0 units of wealth from a perfectly competitive insurance firm at a premium of 7 per unit of coverage, but that the firm charges an additive deductible: if C units of insurance is purchased, the insurance firm pays out (C – d) if the loss occurs, where d 20 is a fixed amount independent of C. (a). For this problem, state the consumer's expected utility function. (b). Set up the consumer's utility maximization problem and find…
- 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. UnsureEnumerate THREE reasons as to why expected utility of wealth mignt be equally good or even a better measure than expected wealth in evaluating investment opportunities.(maximum of tiwo sentences per reason)A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth within the next year. a. What is the consumer's expected wealth one year from now? b. An insurance company offers our consumer full insurance against the possible loss. What premium must the consumer be charged for the insurance company to expect to break even? Explain. c. Suppose our risk-averse consumer is indifferent between getting $85,000 wealthith certainty and facing the above described uncertain situation. What is the maximum premium that the insurance company will be able to charge this consumer for its full insurance policy? Explain
- Bob earn 60,000 a year and an accounting firm each year he receives Reyes Bob has determined that the probability that he receives a 10% raise is .7 the probability that he earns a 3% raise is .2 and the probability that he earns a 2% raise is .1 a competing company has offered Bob a similar position for 65,000 a year Bob wonders if he should take the new job or take his chances with his current job. a. Find the mathematical expectation of the dollar amount of his raise at his current job b.QUESTION 4 Mrs. Obaatanpa has a wealth of Ghe 3,500 for one year. There is a 35% probability that she will get sick and she estimates her loss from the illness to be Gh 1,600. Her utility function is given as U(Y) = VY, where Y is the amount of wealth she has. a) Comment on her utility function. Is she risk-neutral? b) Estimate the risk that she faces and explain. c) What is her expected utility? d) Suppose that she can buy an insurance policy that will cover the entire loss, what is the maximum premium she would be willing to pay?7 3. How would the utility of a risk lover look like? a. Graph the utility function. Will this person be willing to pay for insurance?
