1. Jerry has wealth of $60 and derives utility from this according to the utility functionU(w) = 1 - -,Where w is his wealth. Jerry now finds a lottery ticket (whose drawing is tomorrow)that offers a 50% chance of winning $5.(a) What is the expected value of the lottery ticket?(b) What is the minimum amount for which Jerry would be willing-to-sell the ticket?(c) Which is bigger, your answer to (a) or (b)? Use a clearly labelled diagram toexplain why.(d) If he does not sell the ticket, what is Jerry's cost of risk?

Utility function : U(w) = 1 - 1/w Wealth of Jerry = 60 Probability of winning lottery = 50% = 0.5…

Answered: 1. Jerry has wealth of $60 and derives…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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)
A. From the graph below explain how an insurance plan which provides the buyer a $15,000 wealth level, regardless of any uncertain event, is a good deal for the buyer? In other words, what does the distance between points D’ and C’ represent? Note we are referring to D prime, not D. B. Considering the graph below, can you explain the difference between expected utility and certainty utility?
A10.
solve d please
1. Tanner is choosing between two investment options. He can invest $500 now and get (guaranteed) $550 in one year, or invest $500 now and get (guaranteed) $531.40 back later today. The risk-free rate is 3.5%. Which investment should Tanner prefer? A) $531.40 later today, since $1 today is worth more than $1 in one year. B) $550 in one year, since it is $50 more than he invested rather than $31.40 more than he invested. C) Neither - both investments have a negative NPV. D) Tanner should be indifferent between the two investments, since both are equivalent to the same amount of cash today.
help please answer in text form with proper workings and explanation for each and every part and steps with concept and introduction no AI no copy paste remember answer must be in proper format with all working
4. A taproom owner is trying to determine how to structure his manager's compensation. One option he considers is a flat salary of $70,000 per year. The second option is a base salary of $30,000 plus 15% of the taproom's profit. If the manager puts a lot of effort into her job, the taproom's annual profit will be $500,000 with 75% probability and $100,000 with 25% probability. If the manager exerts only modest effort, the taproom's profit will be $500,000 with 25% probability and $100,000 with 75% probability. The manager's opportunity cost of putting a lot of effort into her job is $50,000, while her opportunity cost of exerting only modest effort is $25,000. a. Draw the game tree for the interaction between the taproom owner and the manager. Assume that the taproom owner moves first. b. What is the equilibrium outcome for this game? What kind of contract should the taproom owner offer? What level of effort will the manager choose? Explain.
5
1. Risk Premium: Assume your wealth is $100 and like in the Veritassium video you're offered a bet of a 50% chance of winning $10 and a 50% chance of losing $10. Assume you have square root utility. a. What is the utility you enjoy by holding the $100 of current wealth? b. What is the expected utility you foresee by entering the bet? Will you take the bet? c. What is your risk premium? Do you think someone would pay this to avoid the bet? d. Draw a diagram and label the relevant values.

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