PROBLEM (4) A homeowner with expected utility preferences with ?(?) = √? (sqare root x) owns a house worth $490k. There is a probability p that she will experience a house fire, in which case the damages will cost $240k. A risk-neutral insurance company asks for an insurance premium of $10k in return for covering the damages fully in case of a fire. (a) What should p be so that the homeowner is willing to insure her house? (b) What should p be so that the insurance company is willing to offer insurance?
Q: Refer to the figure above. If the economy is initially at point A in both panels, and the rate of…
A: The inflation rate refers to the rise in the general price level of the economy. It represents the…
Q: There is a unit mass of individuals ("sellers") willing to sell their cars to a unit mass of buyers.…
A: In a Perfect Bayesian equilibrium, both buyers and sellers have perfect information about the…
Q: Calculate the chain-weighted Real GDP for Year 3, using Year I as the base year. Here are all the…
A: The chain-weighted method is a technique used to calculate real Gross Domestic Product by adjusting…
Q: tefer to the graph for the health care market. A health insurance plan that pays four-fifths of the…
A: This can be described as the use, utilization, or expenditure of resources, commodities or services…
Q: Figure 3-1 Price A to B OB to A OD1 to D2 Demand, D Refer to Figure 3-1 above. A decrease in the…
A: The general economic phenomenon of the opposite relationship between price and quantity demanded is…
Q: Consider a keynesian macromodel Y=(C0+G+I) / (1-c) where C0 is autonomus consumption, G is…
A: The objective of the question is to understand the impact of an increase in labor productivity and…
Q: Consider a keynesian macromodel Y=(C0+G+I) / (1-c) where C0 is autonomus consumption, G is…
A: The investment level and the interest rates have an inverse relationship. Interest rates influence…
Q: a. How many workers should the firm hire? workers b. What wage will the firm pay? $ c. Suppose…
A: The monopsony market represents the opposite of the monopoly market where there is only a single…
Q: Assume the management of two large firms selling canned vegetables hold a secret meeting to create a…
A: Collusion refers to a secretive or illegal agreement or cooperation between two or more parties,…
Q: I need help understanding the broken window fallacy and is it a good idea to agree with it?
A: The broken window fallacy is a concept introduced by the French economist Frédéric Bastiat in his…
Q: Cost-push inflation happens when technological innovation unexpectedly lowers the cost of…
A: Inflation refers to the general increase in the prices of goods and services over time. When the…
Q: As a manufacturer of hats, you are producing 10 hats using 16 capital and 7 labour. The price of…
A: Production is a process in which inputs are transformed into final goods and services. The major…
Q: is the federal government's plan for spending and tax revenues.
A: The term federal government designates the main body in charge of managing and supervising national…
Q: The demand price for a monopolistic firm's product is a function of quantity q and quality s: P…
A: The demand for the monopolistic firm is given as where, q is the quantity and s is the quality,The…
Q: Question 29 Inflation rate (percent per year) 10 3 LRPC₂ LRPC LAPC₁ SRPC, SRPC, SRPC, 468 10 12 14…
A: The philips curve in macreconomics is an economic model which gives us an inverse relationship…
Q: Consumers' and Producers' Surplus The quantity demanded x (in units of a hundred) of the Mikado…
A: To find the consumers' surplus and producers' surplus at equilibrium, we need to first find the…
Q: Sleek Sneakers Co. is one of many firms in the market for shoes. Assume that Sleek is currently…
A: A monopolistic competitive market consists of many firms producing differentiated products. Entry or…
Q: (Figure: Cost Schedule) Quantity Fixed Cost 0 1 2 234 3 4 5 A) $13 B) $9.40 C) $47 $11 11 11 11 11…
A: Average Total Cost represents the average cost incurred to produce one unit of output. It includes…
Q: 1. City planners are proposing a 5% increase in all water rates. Prior to adopting this policy, the…
A: A proposed plan suggests that there could be a 5% increase in the water rates. The water department…
Q: Use the figure below to answer the following question(s): Sm1 Sm2 MINI 125 175 250 Rate of Interest…
A: Transaction demand for money refers to the demand for money that arises from the need to facilitate…
Q: By forcing monopolists to set price equal to marginal cost, A. economic loss can occur. B. economic…
A: A monopoly is a market structure in which a single seller or producer dominates the entire supply of…
Q: A medical vaccine is produced and sold in a perfectly competitive market. Assume that the medical…
A: The market is characterized by a large number of sellers and buyers with homogeneous products. The…
Q: Neoclassical economics does NOT argue _______ Question 1 options: GDP is determined by supply…
A: Neoclassical economics is a school of economic thought emphasizing individual rationality, market…
Q: Suppose the employers in the fisher's labour market begin to discriminate against male workers, and…
A: All female workers will migrate to the fisher's labor market due to the higher wages:This option…
Q: The graph demonstrates the domestic demand and supply for a good , as well as the world price for…
A: A demand curve shows the relationship between the price of a good and the services and the demand…
Q: Consider the market shown in the figure. Compute the consumer surplus at the equilibrium price and…
A: Consumers surplus is the difference between the highest price a consumer is willing to pay and the…
Q: Suppose that the productivity per worker in the apple juice and grape juice industries of Westlake…
A: Opportunity cost is the value of the next best alternative use of resources. In our context,…
Q: Please don't provide handwritten solution.... In May 1991, Car and Driver described a Jaguar…
A: Demand refers to the willingness to pay by consumers for a good or service in the market for the…
Q: Consider a keynesian macromodel Y=(C0+G+I) / (1-c) where C0 is autonomus consumption, G is…
A: The Keynesian economist deals with macroeconomic models that show how aggregate demand influences…
Q: question #18 Wage $5.40 $5.00 $4.90 0 D Quantity of Labor Slabor + tax Slabor Refer to the above…
A: Tax refers to the sum of money that the government collects from the producers and consumers for…
Q: Use the figure below to answer the following questions. Price E H F D MR Select one: OA. ABD OB. ACD…
A: A demand curve shows the relationship between the price of a good and the services and the demand…
Q: 72 71 O r2 and Y4 O IS2 O r2 and Y5 Y3 O r1 and Y1 Y₁ Y4 Ys IS Y₂ Refer to the figure above. If the…
A: Aggregate expenditure describes the total amount of spending in the economy through consumption,…
Q: Question 3: Consider the two-period model. The consumer has an asset, which is worth A in the…
A: The consumer's budget constraint is a representation of the combinations of goods and services that…
Q: 3. How short-run profit or losses induce entry or exit Citrus Scooters is a company that…
A: A monopolistically competitive market consists of numerous firms that offer differentiated products.…
Q: The demand function for a certain brand of CD is given by p = −0.01x2 − 0.2x + 7 where p is the unit…
A: Producer surplus is an economic measure that represents the difference between the actual amount a…
Q: he Dean of a College is looking for a tenured professor to teach in the Core Curriculum. Monetary…
A: Nash Equilibrium in game theory is a decision making strategy that a player can achieve by selecting…
Q: Price and cost 18 16- 14 12- 10 Market 1 CID Price and cost Market 2 If the firm wants to maximize…
A: The marginal revenue is the extra revenue that the firm earns when it sells an extra unit of output.…
Q: Scenario 2: Andy borrows money from Jack with an interest rate of 3 percent, but there is an…
A: The real interest rate is the nominal interest rate adjusted for the effects of inflation or…
Q: Suppose the United States has two utilities, Commonweath Utilities and Consolidated Electric. Both…
A: Sustainable development is one of the most debated topics in the current scenario. Governments over…
Q: Wealth, earnings, and disposable income are just three of several ways of looking at inequality.…
A: This can be described as the amount of money a person or household has available for spending and…
Q: Use the figure below to answer the following questions. Price (dollars per DVD rental) 7.00 6.00…
A: As we know producer surplus is the difference between the marginal cost of production and total…
Q: What is the current real GDP per person in South Africa? How has this changed over the past 10…
A: The word "economic environment" refers to any or all external economic parts that influence shopper…
Q: Suppose that investment spending decreases by $300 and no leakages occur except household saving.…
A: This can be defined as a concept that shows the total amount of demand for the commodity and…
Q: What kind of market would describe the museum? Perfectly competitive market Single-price monopoly…
A: In this case, we have to discuss the term monopoly. In this market, only one single seller and many…
Q: The figure below shows the market for water-skiing permits on Shuswap Lake in British Columbia.…
A: The production of goods that are well consumed by people in society. However, the production process…
Q: Transfer payments represent income that is not earned but received by individuals. O True O False
A: A transfer payment alludes to a payment made by a government or an association to people,…
Q: Which of these terms is t Probability wei Symmetry betw Value maximisa Oa. O b. O c. O d. Reference…
A: Prospect theory is a behavioral economic concept that explores how individuals make decisions under…
Q: Figure 94 Monopolist (dollars) 10 8 0 Quantity MR MC D Refer to Figure 94. Suppose that the…
A: Monopoly refers to the type of market where a single seller, producer, or firm dominates that market…
Q: How many Pareto optimal pairs are there in this game?
A: There are 2 players, namely Player A and Player B. The outcomes for the players depend on their…
Q: 1. Adjust the accompanying diagram to reflect this development. Set point A at the new combination…
A: Macroeconomic analysis provides a comprehensive picture of the financial status of an economy. It…
PROBLEM (4) A homeowner with expected utility preferences with ?(?) = √? (sqare root x) owns a house worth $490k. There is a probability p that she will experience a house fire, in which case the damages will cost $240k. A risk-neutral insurance company asks for an insurance premium of $10k in return for covering the damages fully in case of a fire.
(a) What should p be so that the homeowner is willing to insure her house?
(b) What should p be so that the insurance company is willing to offer insurance?
Unlock instant AI solutions
Tap the button
to generate a solution
Click the button to generate
a solution
- PROBLEM (4) A homeowner with expected utility preferences with u(x)= sqare root x owns a house worth $490k. There is a probability p that she will experience a house fire, in which case the damages will cost $240k. A risk-neutral insurance company asks for an insurance premium of $10k in return for covering the damages fully in case of a fire. (a) What should p be so that the homeowner is willing to insure her house? (b) What should p be so that the insurance company is willing to offer insurance?a) (3) Consider two investments X and Y, where X pays $0 and $10 with equal probability and Y pays 0 with probability 0.75 and $20 with probability 0.25. What investment would an investor choose if her utility function is u(x) = x? u(x) = x u(x) = 1-e 10 () (i) (ii)Utility Theory You live in an area that has a possibility of incurring a massive earthquake, so you are considering buyingearthquake insurance on your home at an annual cost of $180. The probability of an earthquake damagingyour home during one year is 0.001. If this happens, you estimate that the cost of the damage (fully coveredby earthquake insurance) will be $160,000. Your total assets (including your home) are worth $250,000. A. Apply Bayes’ decision rule to determine which alternative (take the insurance or not) maximizes yourexpected assets after one year.
- Alice would be willing to pay up to £15 for a gamble giving a 35% chance of £50 and a 65% chance of £10. (a) What is the expected value of this gamble? Represent Alice's preference over risk in a large, suitably labelled graph. The graph should include Alice's expected utility from the gamble described above (b) Represent on the same graph the maximum amount that Alice would pay to remove the risk from this gamble.To go from Location 1 to Location 2, you can either take a car or take transit. Your utility function is: U= -1Xminutes -5Xdollars +0.13Xcar (i.e. 0.13 is the car constant) Car= 15 minutes and $8 Transit= 40 minutes and $4 What is your probability of taking transit given the conditions above? What is your probability of taking transit if the number of buses on the route were doubled, meaning the headways are halved? Remember to include units.Choice under uncertainty Alice would be willing to pay up to £15 for a gamble giving a 35% chance of £50 and a 65% chance of £10. 5. (a) What is the expected value of this gamble? Represent Alice's preference over risk in a large, suitably labelled graph. The graph should include Alice's expected utility from the gamble described above. (b) Represent on the same graph the maximum amount that Alice would pay to remove the risk from this gamble.
- (a) Given a utility function of an individual is U(x) = x² - 4x, determine his risk attitude. (b) With a utility function of U(x) = x - 3x², where x is the amount invested. (i) determine if this function satisfy the two properties of utility functions. (ii) compute the utility when the amount invested is 3 and 5 respectively.Suppose that Bill's utility function of wealth is given by u(w) = √w, where w represents his total wealth in dollars. Bill's total wealth is $360,000. If an earthquake happens, his wealth will be reduced to $250,000 with the loss of his house. Suppose the probability of an earthquake happening is 10%. (a) Is Bill risk-averse, risk-loving, or risk-neutral? Explain. (b) If Bill could buy insurance to completely avoid the loss, how much would he be willing to pay for this insurance at most? Explain.Consider a city where everyone commutes to the city center and commuting cost per mile per month is $40. Each household occupies a 1,000-square-foot dwelling and has $7,000 worth of possessions in its dwelling. The probability that any particular household will be burglarized (involving the uninsured loss of all possessions) is 0.10 at the city center and decreases by 0.01 per mile (to 0.09 at one mile, 0.08 at two miles, and so on). The housing price is $1.00 per square foot at the city center. a) Draw the housing-price curve for locations up to five miles from the city center.
- Consider a city where everyone commutes to the city center, and the commuting cost per mile per month is $50. Each household occupies a 1,500-square-foot dwelling and has $10,000 worth of possessions in its dwelling. The probability that any particular household will be burglarized and lose all its possessions (no insurance) is 0.2 (per month) at the city center and decreases by 0.01 per mile (to 0.19 at one mile, 0.18 at two miles, and so on). The price of housing is $2 per square foot at the city center. 1. Starting from the center, a one-mile move outward changes the expected value of the loss from crime from_______ to _______, a change of _________ per square foot. 2. The slope of the housing-price curve is _________, computed as __________ 3. Draw the housing-price curve for locations up to five miles from the city center. The price changes from ________ at the city center to _________ five miles away.A consumer has the following utility function u(x)= root x where x is the consumer’s total wealth. The consumer's total wealth is the consumer’s cash plus the value of her house. The consumer has $400 in cash (risk free) plus a house. The house is currently worth $756. With probability 70% nothing happens, and the value of the house stays the same. With probability 30%, high winds will cause $580 in damages to the house (in which case, the house value becomes $176). An insurance company offers to fully insure the house at an insurance premium p. What is the maximum insurance premium that the consumer is willing to pay? The consumer is willing to pay at most p=. The fair insurance premium is . In this example, the associated risk premium is .The promoter of a football game is concerned that it will rain. She has the option of spending $14,040 on insurance that will pay $39,000 if it rains. She estimates that the revenue from the game will be $65,040 if it does not rain and $30,040 if it does rain. What must the chance of rain be if buying the policy has the same expected return as not buying it? Write expressions showing the expected returns if the promoter does and does not purchase the insurance, using p to represent the probability of rain. Without insurance, E(return) = With insurance, E(return) = The chance of rain must be _%.