ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Assume that Mary’s utility function is U(W) = W1/3, where W is wealth. Suppose that Mary has
an initial level of wealth of $27,000. How much of a risk premium would she require to
participate in a gamble that has a 50% probability of raising her wealth to $29,791 and a 50%
probability of lowering her wealth to $24,389?
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- Janet's broad attitude to risk (risk averse, risk neutral, or risk loving) is independent of her wealth. She has initial wealth w and is offered the opportunity to buy a lottery ticket. If she buys it, her final wealth will be either w + 4 or w – 2, each equally likely. She is indifferent between buying the ticket and not buying it. Janet offers her friend Sam (who has identical preferences and initial wealth) the following proposition: They buy the ticket together, and share the cost and proceeds equally. Sam has another idea: They buy two tickets (that have independent outcomes) and share the costs and proceeds equally. Is this better than buying no tickets? O a. Yes, Sam's solution is preferable to buying no ticket. O b. Yes, Sam's solution is inferior to buying no ticket. O c. Both Janet and Sam would be indifferent between pooling their risk and buying no ticket. O d. There is not enough information to answer this question.arrow_forwardJohnny owns a house that is worth $100,000. There is a O.1% chance that the house will be completely destroyed by fire, leaving Johnny with $0. Johnny's utility function is u(x) = vx, where x represents final wealth. Assuming that Johnny has no other wealth, what's the maximum amount that he would be willing to pay for an insurance policy that completely replaces his house if destroyed by fire? Make sure to answer with the dollar sign and then the number, i.e. $532.17. Be accurate up to the second decimal. You should not need to round. Hint: The hundredths place should be 0. Enter your answer herearrow_forwardPlease no written by hand and no emagearrow_forward
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- An investor has a power utility function with a coefficient of relative risk aversion of 3. Compare the utility that the investor would receive from a certain income of £2 with that generated by a lottery having equally likely outcomes of £1 and £3. Calculate the certain level of income which, for an investor with preferences as above, would generate identical expected utility to the lottery described. How much of the original certain income of £2 the investor would be willing to pay to avoid the lottery? Detail the calculations and carefully explain your answer.arrow_forwardJanet's broad attitude to risk (risk averse, risk neutral, or risk loving) is independent of her wealth. She has initial wealth w and is offered the opportunity to buy a lottery ticket. If she buys it, her final wealth will be either w + 4 or w – 2, each equally likely. She is indifferent between buying the ticket and not buying it. Janet offers her friend Sam (who has identical preferences and initial wealth) the following proposition: They buy the ticket together, and share the cost and proceeds equally. Sam has another idea: They buy two tickets (that have independent outcomes) and share the costs and proceeds equally. Which of the following statements is true? O a. There are risk averse expected utility maximisers who would prefer Janet's idea to Sam's idea. O b. Any expected utility maximiser whose utility is a strictly increasing function of wealth would prefer Sam's idea to Janet's idea. O c. Any risk averse expected utility maximiser would prefer Sam's idea to Janet's idea. O…arrow_forwardFor constants a and b, 0 < b, b 1, and expected profit E(p), the expected utility function of a person who is risk-neutral can be written as E(U) = Which one: a+b^p a + (E(p))^b. a - bE(p). a + bE(p). a + (E(p))^(-b).arrow_forward
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