ule_item_id=5186850vas UCLA Undergraduate Ed... wwAlternative formatsUIT EmailuclaKB20. Individuals with initial wealth $100 and different preferences over risk are consideringpurchasing a lottery ticket for $10. The lottery pays $20 with 50% probability, andnothing otherwise. Consider the following statements:(a) No statement is correct.(b) Only I is correct.(c) Only II is correct.(I) The certainty equivalent of this gamble is higher for the risk-averse individuals,compared to risk-neutral individuals.UCLA Campus Dir...(II) The expected wealth after purchasing the ticket is higher than without purchasingit.(III) The certainty equivalent of purchasing the lottery ticket is $100 for risk-neutralindividuals.9(d) Only III is correct.(e) More than one statement is correct.8Support staff by S... UCLA Evaluation CaInformation for the next two questions: In a used car market, there are 10 identicalbuyers, each wanting to buy one car. There are 10 non-identical sellers indexed by i EDIIF9Page < 9F10> of 16OF11

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Individuals with initial wealth $100 and different preferences over risk are considering purchasing a lottery ticket for $10. The lottery pays $20 with 50% probability, and nothing otherwise. Consider the following statements: (I) The certainty equivalent of this gamble is higher for the risk-averse individuals, compared to risk-neutral individuals. (II) The expected wealth after purchasing the ticket is higher than without purchasing it. (III) The certainty equivalent of purchasing the lottery ticket is $100 for risk-neutral individuals. (a) No statement is correct. (b) Only I is correct. (c) Only II is correct. 9 (d) Only III is correct. (e) More than one statement is correct. 10 identical

Individuals with initial wealth $100 and different preferences over risk are considering purchasing a lottery ticket for $10. The lottery pays $20 with 50% probability, and nothing otherwise. Consider the following statements: (I) The certainty equivalent of this gamble is higher for the risk-averse individuals, compared to risk-neutral individuals. (II) The expected wealth after purchasing the ticket is higher than without purchasing it. (III) The certainty equivalent of purchasing the lottery ticket is $100 for risk-neutral individuals. (a) No statement is correct. (b) Only I is correct. (c) Only II is correct. 9 (d) Only III is correct. (e) More than one statement is correct. 10 identical

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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.
Consider a gamble/lottery in which a coin is tossed rapidly until a tail comes up. 2m rupee is given if the tail comes up at the mth toss. Let the individual be risk neutral, having u(x) = x where x is the amount of winning. Find the expected utility from the lottery.
Q1) An expected utility maximiser owns a car worth £60000£60000 and has a bank account with £20000£20000. The money in the bank is safe, but there is a 50%50% probability that the car will be stolen. The utility of wealth for the agent is u(y)=ln(y)u(y)=ln⁡(y) and they have no other assets. Q2) Consider the setup from Question 1. A risk-neutral insurance company is willing to insure the car at the premium of π=£2/3π=£2/3 for every one pound of coverage. Q3) Consider the setup from Questions 1 and 2. How much profits, in expectation, does the insurance company earn on insuring the individual?
Suppose that a decision is faced with three decision alternatives and four states of nature. The following profit payoff table is constructed: Alternatives State of Nature S1 S2 S3 S4 Α1 18 12 15 8 Α2 15 14 10 11 13 16 19 15 Α3 Assuming that the decision maker has no knowledge about the probabilities of occurrence of the four states of nature, find the decisions to be recommended under each of the following criteria: i. Maximin criterion ii. Maximax criterion iii. Minimax Reject criterion
Yuki has a utility function given by u(x) = In(x). She faces a gamble that pays 10 with probability 0.5 and 15 with probability 0.5. Comment on how Yuki's certainty equivalent relative to the expected value varies as her utility function goes from concave from %3D convex.
Adam is offered a performance based wage that will be equal to $4.200 with probability 1/3 or equal to $3,600, with probability 2/3. Adam says that getting $3,500 for certain would be as good as being offered that random wage. Which, of the following sentences, is true? The risk premium he associates with this wage offer is $100. The risk premium he associates with this wage offer is $300. None of the other answers are correct. OThe risk premium he associates with this wage offer is $700. The risk premium he associates with this wage offer is $400.
A person has wealth of $500,000. In case of a flood her wealth will be reduced to $50,000. The probability of flooding is 1/10. The person can buy flood insurance at a cost of $0.10 for each $1 worth of coverage. Suppose that the satisfaction she derives from c dollars of wealth (or consumption) is given by u(c) = √c. Let C denote the contingent commodity dollars if there is a flood (horizontal axis) and CNF denote the contingent commodity dollars if there is no flood (vertical axis). 1 Determine the contingent consumption plan if she does not buy insurance. 2 Assume that the person has von Neumann-Morgenstern utility function on the contingent consumption plans. Write down the expected utility U(CF, CNF) and derive the MRS. 3 Solve for optimal (CF, CNF). To this end, first use the tangency condition (TC) to find the relation between the two contingent commodities (CF, CNF). Next, use (BC) to solve for their values. What is the optimal amount of insurance K the person will buy? (Note:…
Max Pentridge is thinking of starting a pinball palace near a large Melbourne university. His utility is given by u(W) = 1 - (5,000/W), where W is his wealth. Max's total wealth is $10,000. With probability p = 0.9 the palace will succeed and Max's wealth will grow from $10,000 to $x. With probability 1 - p the palace will be a failure and he’ll lose $5,000, so that his wealth will be just $5,000. What is the smallest value of x that would be sufficient to make Max want to invest in the pinball palace rather than have a wealth of $10,000 with certainty? ____ (Please round your final answer to the whole dollar, if necessary)
Suppose every driver faces a 1.5% probability of an automobile accident every year, and on an average an accident will cost each driver $10,000. Suppose there are two types of individuals: those with $50,000 and those with $6,000 in the bank. Assume that individuals with $6,000 in the bank declare bankruptcy if they get in an accident. In the bankruptcy, creditors receive only what individuals have in the bank. What is the expected loss from an accident for individuals with $6,000 in the bank if they don’t buy comprehensive insurance coverage? a. $50,000.00 b. $6,000.00 c. $150.00 d. $90.00
. Bob le Flambeur is offered a raffle ticket. With probability p, the raffle ticket wins, and pays 5 dollars. With probability 1-p, the ticket loses and pays nothing. One ticket costs 1 dollar. (a) If Bob has von Neumann-Morgenstern utility u(x)=³ over change in wealth z, what is the certainty equivalent for Bob of buying one ticket (as a function of p)? What is the risk premium? Solution: If Bob buys a raffle ticket, then with probability p he gains 4 dollars (5 dollars minus the price of the ticket), and with probability 1-p he loses 1 dollar. His expected utility is therefore 64p-(1-p) = 65p-1. The certainty equivalent is therefore CE(p) = 365p-1. The expected value of the lottery is 4p- (1 − p) = 5p - 1, giving a risk premium of R(p)=5p-1-65p - I. (b) Now suppose that, instead of the utility function above, Bob is risk-neutral. An un- scrupulous raffle saleswoman makes Bob the following offer. For 50 cents, she will tell him whether the ticket for sale will win or lose before Bob…
You need to hire some new employees to staff your startup venture. You know that potential employees are distributed throughout the population as follows, but you can't distinguish among them: Employee Value Probability $30,000 0.25 $47,000 0.25 $64,000 0.25 $81,000 0.25 The expected value of hiring one employee is $ Suppose you set the salary of the position equal to the expected value of an employee. Assume that employees will not work for a salary below their employee value. The expected value of an employee who would apply for the position, at this salary, is Given this adverse selection, your most reasonable salary offer (that ensures you do not lose money) is
4) Consider investors with preferences represented by the utility function U = E(r) – Ao². (a) Draw the indifference curve representing a utility level of 10% for an in- vestor with a risk aversion parameter A = 3 in expected return-standard deviation space. (b) In the same graph, draw the indifference curve representing a utility level of 15% for an investor with a risk aversion parameter A = 3. (c) In the same graph, draw the indifference curve representing a utility level of 10% for an investor with a risk aversion parameter A = 5.