Willy's only source of wealth is his chocolate factory. He has the utility function given by PVG +(1 – p) Cns where p is the probability of a flood, 1 - p is the probability of no flood, and cf and Cnf are his wealth contingent on a flood and on no flood, respectively. The probability of a flood is p = 1/11. The value of Willy's factory is $550,000 if there is no flood and 200,000 if there is a flood. Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company $4/44 x whether there is a flood or not, but he gets back $x from the company if there is a flood. Willy should buy
Willy's only source of wealth is his chocolate factory. He has the utility function given by PVG +(1 – p) Cns where p is the probability of a flood, 1 - p is the probability of no flood, and cf and Cnf are his wealth contingent on a flood and on no flood, respectively. The probability of a flood is p = 1/11. The value of Willy's factory is $550,000 if there is no flood and 200,000 if there is a flood. Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company $4/44 x whether there is a flood or not, but he gets back $x from the company if there is a flood. Willy should buy
I got wrong answer last time, I posted this for 2nd time..
Please check the utility function and given values before answering.
Transcribed Image Text:Willy's only source of wealth is his chocolate factory. He has the utility function
given by
PVC5 + (1 – p) Jenf,
where p is the probability of a flood, 1 - p is the probability of no flood, and Cf and
Cnf are his wealth contingent on a flood and on no flood, respectively. The probability
of a flood is p = 1/11. The value of Willy's factory is $550,000 if there is no flood
and 200,000 if there is a flood. Willy can buy insurance where if he buys $x worth of
insurance, he must pay the insurance company $4/44*x whether there is a flood or
not, but he gets back $x from the company if there is a flood. Willy should buy
the coverage of $350,000.
no insurance.
the coverage of $450,000.
the coverage of $550,000.
There is not enough information to determine whether Willy should buy
insurance or not.
Expression, rule, or law that gives the relationship between an independent variable and dependent variable. Some important types of functions are injective function, surjective function, polynomial function, and inverse function.
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