A risk neutral insurer offers to insure an individual with a wealth of 25 dollars against a loss of 21 dollars (i.e. leaving the individual with 4 dollars after the loss). The individual is equally likely to be either of two types, A or B, which differ only in the probability that the loss occurs. For type A, the loss occurs with probability 1/3, and for type B the loss occurs
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- Y5 Alfred is a risk-averse person with $100 in monetary wealth and owns a house worth $300, for total wealth of $400. The probability that his house is destroyed by fire (equivalent to a loss of $300) is pne = 0.5. If he exerts an effort level e = 0.3 to keep his house safe, the probability falls to pe = 0.2. His utility function is: U = w0.5 – e where e is effort level exerted (zero in the case of no effort and 0.3 in the case of effort).a. In the absence of insurance, does Alfred exert effort to lower the probability of fire?HINT: Calculate and compare the expected utility i) with effort, and ii) without effort. If effort is exerted, then the effort cost is paid regardless of whether or not a fire occurs.b. Alfred is considering buying fire insurance. The insurance agent explains that a home owner’s insurance policy would require paying a premium α and would repay the value of the house in the event of fire, minus a deductible “D”. [A deductible is an amount of money that the…Halsen, a marketing manager at Business X, has determined four possible strategies (X1, X2, X3, and X4) for promoting the Product X in London. She also knows that major competitor Product Y has 4 competitive actions (Y1, Y2, Y3 and Y4) it’s using to promote its product in London, too. Ms. Halsen has no previous knowledge that would allow her to determine probabilities of success of any of the four strategies. She formulates the matrix below to show the various Business X strategies and the resulting profit, depending on the competitive action used by Business Y. Determine which strategy Ms. Halsen should select using, the following decision criteria. Please explain your answer for each strategy. a)Maximax; b)Maximin; c)Minimax regret Business X Strategy Business Y Strategy Y1 Y2 Y3 Y4 X1 25 57 21 26 X2 17 29 20 34 X3 47 31 32 37 X4 35 27 30 35Halsen, a marketing manager at Business X, has determined four possible strategies (X1, X2, X3, and X4) for promoting the Product X in London. She also knows that major competitor Product Y has 4 competitive actions (Y1, Y2, Y3 and Y4) it’s using to promote its product in London, too. Ms. Halsen has no previous knowledge that would allow her to determine probabilities of success of any of the four strategies. She formulates the matrix below to show the various Business X strategies and the resulting profit, depending on the competitive action used by Business Y. Determine which strategy Ms. Halsen should select using. Maximax, maximin or minimax regret? Business X Strategy Business Y Strategy Y1 Y2 Y3 Y4 X1 25 57 21 26 X2 17 29 20 34 X3 47 31 32 37 X4 35 27 30 35
- In a tight real estate market, the probability that a buyer's offer will be accepted is 0.50 if she bids more than 15 thousand above the asking price. The probability of acceptance drops to 0.20 if she bids below this amount. Overall, sixty percent of offers are more than 15 thousand above the asking price. The probability that a randomly selected offer will be accepted by the seller is closest or equal to: 0.15 0.38 0.20 0.32 O 0.18A salesperson is trying to sell cars. The number of cars that she will sell depends on her effort "e" and her luck. Given her effort e, with probability 4e she is able to sell four cars, and with probability (1 - 4e) she is able to sell only one car. Her personal cost of effort is 100e². The dealership pays her a bonus b for each car sold. The salesperson is risk-neutral, and wants to maximize her expected utility, which is her expected income minus her effort cost. a) Given the bonus b, the salesperson's best response function is b) Suppose the dealership pays b = 2. Then the expected number of cars sold will be E(Q)=The owner of a firm must hire a manager to launch a new product. The new product can be successful and generate a revenue of 5000 or fail and generate a revenue of 1000. The probability of succ success is 0.7 (and hence the probability of failure is 0.3). If the manager exerts low effort (e=e,) then the probability of success is 0.2 (and hence the probability of failure is 0.8). The manager's utility effort chosen by the manager, with D(e) = 10 and D(e)-o. The manager's reservation utility is -40 The wage paid by the owner to the manager is the owner's only cost. The owner is risk neutral. If the owner could observe the manager's effort and would want the manager to exert high effort, what contract would he offer to the manager? What is the own Assume from now on that the manager's effort is unobservable. Suppose that the owner still wants to ensure that the manager accepts the proposed contract an this to happen. c) a)? a) b) It can be shown that the constraints in point b) must be…
- uestion Completion Status: Player 2 L R U 1,0 0,1 Player 1 D 0,1 1,0 Suppose Player 2 is using the following strategy: she plays L with probability 0.70 and she plays R with probability 0.30. In this case: a) If Player 1 plays U, then Player 1 attains an expected payoff of 0.70 b) If Player 1 plays D, then Player 1 attains an expected payoff of 0.30 c) Therefore, the best response of Player 1 is to play U with probability 1.00 and D with probability 0Eric has a job at an electronics store in a mall. Eric doesn't like to work hard, and it costs him $100 to do so. Eric's employer cannot observe whether Eric works hard or not. If Eric works hard, there is a 75% probability that electronics goods profits will equal $400 a day and a 25% probability that electronics goods profits will equal $100 a day. If Eric shirks, there is a 75% probability that electronics goods profits will equal S100 a day and a 25% probability that electronics goods profits will equal $400 a day. Suppose Eric is paid $200 if electronics goods profits are $400 a day and $50 if electronics goods profits are S100 a day. Eric will because the net gain of from shirking is than the net gain of from working hard. O shirk; $87.50; more; $62.50 O shirk; $125; more; $118 O work hard; S50; less; $62.50 O work hard; $100; less; $250A seller will run a second-price, sealed-bid auction for an object. There are two bidders, a and b, who have independent, private values v; which are either 0 or 1. For both bidders the probabilities of v; = 0 and v; = 1 are each 1/2. Both bidders understand the auction, but bidder b sometimes makes a mistake about his value for the object. %3| Half of the time his value is 1 and he is aware that it is 1; the other half of the time his value is 0 but occasionally he mistakenly believes that his value is 1. Let's suppose that when b's value is 0 he acts as if it is 1 with probability 1/2 and as if it is zero with 2 probability. So in effect bidder b sees value 0 with probability 1/4 and value 1 with probability 4. Bidder a never makes mistakes about his value for the object, but he is aware of the mistakes that bidder b makes. Both bidders bid optimally given their perceptions of the value of the object. Assume that if there is a tie at a bid of x for the highest bid the winner is…
- JUST ANSWER SUBPART 2 There are two individuals, Individual A and Individual B. Individual A has an income (Y) of 500 million Rupiah per year. If Individual A is sick, he will lose 25% of his income. Meanwhile, Individual B has an income (Y) of 100 million Rupiah per year, and if Individual B is sick, he will lose 75% of his income. The probability of Individual A and Individual B being sick is the same, which is 10%. If the satisfaction level of Individual A and Individual B is determined by their income level, based on the following function U(Y)=ln Y, would Individual A and Individual B prefer not to have health insurance? Explain Faced with fair actuarially insurance, how much premium is offered to Individual A? Is the premium rate offered the same for Individual B? Explain with the support of graphic illustrations. The government decides to provide compulsory health insurance with a premium rate for Individual A and Individual B, which is 2% of the income of each individual. In…Cat, who owns the same type of house and faces the same probability distribution of losses as Rainie, also purchases full insurance for an actuarially fair premium from Lemonade Insurance Company. We assume that the two houses are independent of each other. In other words, if one house has a fire, this has no impact on the probability of the other house having a fire. 2. What is the probability distribution of total losses for Lemonade Insurance Company if they sell contracts to both Rainie and Cat? Show your work a. b. What is the expected loss or expected payout for Lemonade Insurance Company if they sell contracts to both Rainie and Cat? What is the amount of risk Lemonade Insurance Company faces if they sell contracts to both Rainie and Cat? Show your work с. d. Briefly explain the benefit(s) to Lemonade Insurance Company as the number of insurance contracts sold increases?Suppose that a car - rental agency offers insurance for a week that costs $125. A minor fender bender will cost 34000 whereas a major accident might cost $16 comma 000 in repairs. Without the insurance, you would be personally liable for any damages. There are two decision alternatives: take the insurance, or do not take the insurance. You researched insurance industry statistics and found out that the probability of a major accident is 0.04% and that the probability of a fender bender is 0.18%. The expected payoff if you buy the insurance is $125.00. The expected payoff if you do not buy the insurance is $12.52. Develop a utility function for the payoffs associated with this decision for a risk-averse person. Determine the decision that would result using the utilities instead of the payoffs. Based on the expected payoffs, the best decision is to not purchase the insurance. Are these two decisions consistent?