EBK INTERMEDIATE MICROECONOMICS AND ITS
12th Edition
ISBN: 9781305176386
Author: Snyder
Publisher: YUZU
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Chapter 4, Problem 4.2P
To determine
Whether checking bets is fair or not.
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Suppose you have $10, which you can wager in a game called "double or quits." In this game, you roll a fair die. If you
roll a 4, 5, or 6, you win the game, getting back your $10 plus $10 more for a total of $20. If you roll a 1, 2, or 3, you
lose the game and your $10. Your utility function is shown on the following graph
Utility
10
20
Income
According to this graph of your utility function, would you be considered risk-averse or a risk-taker? Why?
Risk averse because of increasing marginal utility of income
Risk taker because of increasing marginal utility of income
Risk taker because of diminishing marginal utility of income
O Risk averse because of diminishing marginal utility of income
Ann can finish a project either this week or next week. The delayed rewards are 10 in either case. (The project can be done only once or not at all).Next week is busy and the cost of finishing the project are lower this week. The immediate costs are 4 this week and 6 next week. Ann has a quasi-hyperbolic utility withδ= 1 andβ <1. Imagine that Anndoes not finish the project this week. Then she should finish it next week
(A) ifβ >0.6; (B) ifβ >0.4; (C) only ifβ= 1; (D) for anyβ.11.
Suppose that β= 0.5 and Ann correctly anticipates her choice next week. Then she should finish the project
(A) this week; (B) next week; (C) never; (D) not enough information.
can you help me with the bolded question? thank you!
John is deciding whether to exert effort (e = 1) to avoid an accident at work or not exert any effort (e =
0). If e = 1, the probability of an accident is 0.5. If e = 0, the probability of an accident is 1. John's
income without the accident is $100. In case of an accident, medical expenses will be $64. John utility of
income is VI. The cost of effort, C(e), is 0 if effort is e = 0 and 1 if effort is e = 1. John's utility function
is u(l, e) 3D VI — С(e).
%3D
(a) What are the expected utility values that John would face when he exerts effort and when he
does not exert effort? Based on your calculations, should he exert effort? Briefly explain the
intuition behind his decision in one or two sentences.
Now suppose there is a risk neutral insurance company. Suppose the insurance company cannot
monitor whether John exerts effort or not. The insurance company considers two plan contracts.
Contract Plan A:
Premium: p = $36.
Payout in the event of accident: d = $64
Contract Plan B:
Premium: p…
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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- At a different table, Juan wins $600 in a blackjack game. Similarly, he has to choose between $600 or the chance to play a new game. In this game, Juan has a 60% chance of winning nothing and a 40% of winning $1,000. The following graph presents the utility function of Juan with respect to money: U(w) U(w) U(1,000) U(700) U(600) U(400) 400 600 700 1,000 w 10.2.2 1.0 point possible (graded, results hidden) By how much money would his winnings need to increase or decrease so that Juan is indifferent between the $600 and the new game? (in case of an increase, insert a positive number; in case of a decrease, insert a negative number).arrow_forwardSuppose Jessica has two choices: receive $12000 and 30 utils or take a gamble that has a 55% chance of a $20000 and 45 utils, and a 45% chance of a $0 payoff and zero utility. Assuming Jessica is a utility maximizer, what will she likely choose? a) Jessica will not take the gamble b) Jessica will take the gamble c) It cannot be determined d) Jessica is indifferentarrow_forwardSanjay won a poker game against his friends. Now he has to choose between $600 (the winnings) and the chance to play a new game. In this new game, Sanjay has a 50% chance of winning nothing and a 50% chance of winning $1000. The following graph presents the utility function of Sanjay with respect to money: 1. By how much money would his winnings need to increase or decrease so that Sanjay isindifferent between the $600 and the new game? At a different table, Juan wins $800 in a blackjack game. Similarly, he has to choose between $800 or the chance to win a new game. In this game, Juan has a 45% chance of winning nothing and a 55% chance of winning $1000. The following graph presents the utility function of Juan with respect to money: 2. By how much money would his winnings need to increase or decrease so that Juan is indifferent between the $800 and the new game? Please enter a positive number for an increase or a negative number for a decrease.arrow_forward
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- Sean is arguing with his girlfriend, Yvette. They have been going out for a little more than two years. YVETTE: I'm leaving you, Sean. Get over it. SEAN: Are you saying that being single will make you happier than you've been with me? Speaking personally, I think the utility we've had in this relationship was much more than you could have had if you'd been single this whole time! YVETTE: I had taken an economics class and the word "utility" rings a bell. It's not that at all. We've had a fine time. It's that the utility I would get by continuing our relationship isn't worth it anymore. SEAN: I've never been dumped by someone citing the law of before. You're a piece of work, you know that? Yvette doesn't hear. She has already walked off, leaving Sean feeling like something of a sunk cost.arrow_forward2) Explain how utility could be used in a decision where performance is not measuredby monetary value.arrow_forwardSuppose your wealth is 8 and you are considering a bet of a 50% chance of winning $4 and a 50% chance of losing $4. What is your risk premium given you have In utility ? Draw a diagram and label the relevant values.arrow_forward
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