EBK INTERMEDIATE MICROECONOMICS AND ITS
12th Edition
ISBN: 9781305176386
Author: Snyder
Publisher: YUZU
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Chapter 4, Problem 2RQ
To determine
To find:Causes for which diminishing
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The lecture mentions that diminishing marginal utility applies to the consumption of money as well as the consumption of certain food. Can you give another example where diminishing marginal utility applies? Can you think of any example where diminishing marginal utility does not apply?
From utility theory, the demand for insurance depends on the level of risk aversion (i.e. how much you hate uncertainty), the cost of insurance (i.e. if it is within your willingness to pay), as well as wealth. Can you think of anything else that affects demand for insurance?
One of the predictions of prospect theory is that we tend to be overly concerned with relatively small risk. Can you think of any example (besides those given in the lecture) that either speaks to this or is an exception?
Economists define the 'certainty equivalent' of a risky stream of income as the amount of guaranteed money an
individual would accept instead of taking a risk. The certainty equivalent varies between individuals based on their risk
preference. Consider a risky bet that involves a 50-50 chance of losing $5,000 or winning $5,000 for an individual with
starting income of $50,000. Calculate the certainty equivalent income that provides the same utility as this bet for
individuals with these different utility functions: a. U(1) Vi b. U(1) = In(1) where In represents the natural logarithm
function C. U(I) = -1/1 d. What can you conclude about the relative level of risk aversion for these three individuals? e
What would be the certainty equivalent income for this bet for a risk neutral individual? f. What is the likelihood that a
profit maximizing risk neutral insurance company would be willing and able to purchase these bets from the individuals
in a, b and c? Explain.
Economists define the ‘certainty equivalent’ of a risky stream of income as the amount of guaranteed money an individual would accept instead of taking a risk. The certainty equivalent varies between individuals based on their risk preference.
Consider a risky bet that involves a 25% chance of losing $5,000 or a 75% winning $5,000 for an individual with starting income of $50,000. Calculate the certainty equivalent income that provides the same utility as this bet for individuals with these different utility functions:
1. U(I) = I
2. U(I) = I–√
3. U(I) = ln(I)where ln represents the natural logarithm function
Type the numerical answers in the corresponding numbered boxes below. Round your answers to two decimal places. Do not use $ or , in your answers. (for example, enter 45223.45 or 46500.00)
What can you conclude about the relative level of risk aversion for these three individuals? Explain.
Chapter 4 Solutions
EBK INTERMEDIATE MICROECONOMICS AND ITS
Ch. 4.1 - Prob. 1MQCh. 4.1 - Prob. 2MQCh. 4.1 - Prob. 3MQCh. 4.2 - Prob. 1TTACh. 4.2 - Prob. 2TTACh. 4.2 - Prob. 1MQCh. 4.3 - Prob. 1TTACh. 4.3 - Prob. 2TTACh. 4.3 - Prob. 1MQCh. 4.3 - Prob. 2MQ
Ch. 4.3 - Prob. 3MQCh. 4.3 - Prob. 1.1TTACh. 4.3 - Prob. 1.2TTACh. 4.3 - Prob. 2.1TTACh. 4.3 - Prob. 2.2TTACh. 4.3 - Prob. 1.1MQCh. 4.3 - Prob. 2.1MQCh. 4.3 - Prob. 3.1MQCh. 4.4 - Prob. 1TTACh. 4.4 - Prob. 2TTACh. 4 - Prob. 1RQCh. 4 - Prob. 2RQCh. 4 - Prob. 3RQCh. 4 - Prob. 4RQCh. 4 - Prob. 5RQCh. 4 - Prob. 6RQCh. 4 - Prob. 7RQCh. 4 - Prob. 8RQCh. 4 - Prob. 9RQCh. 4 - Prob. 10RQCh. 4 - Prob. 4.1PCh. 4 - Prob. 4.2PCh. 4 - Prob. 4.3PCh. 4 - Prob. 4.4PCh. 4 - Prob. 4.5PCh. 4 - Prob. 4.6PCh. 4 - Prob. 4.7PCh. 4 - Prob. 4.8PCh. 4 - Prob. 4.9PCh. 4 - Prob. 4.10P
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