1. Write a short case that must cover 3 different risk types and 3 different loss types. 2. According to the case, give the answers (what risk cause what loss).
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- What are the typical types of risk faced by a firmOlivia is a student at Boston University. She has 5 hours to study for 2 exams. The tables below show Olivia's expected scores given the amount of time she has to study. Hours Spent Studying Finance Expected Score on Finance Exam 5 4 3 2 1 0 100 96 90 B I 82 60 0 Hours Spent Studying English Expected Score on English Exam 0 1 2 3 4 5 0 40 60 72 77 80 A. Olivia spends 3 hours studying finance and 2 hours studying English. Calculate her gain from the second hour spent studying English. B. Calculate Olivia's opportunity cost of the second hour studying English. C. Assume Olivia increases the time she spends studying English. What happens to the opportunity cost of studying English? Explain. D. Assume that Olivia has the goal of maximizing her total scores on both exams (Finance plus English). How many hours should she study for each exam? E. Olivia learns that her marching band practice has been cancelled, freeing up an additional hour for studying. Given your answer to Part D, will…Who is most risk-averse? a-an individual with slightly diminishing marginal utility. b-all individuals are equally risk-averse. c-an individual with rapidly diminishing marginal utility. d-an individual who does not experience diminishing marginal utility.
- A call option is "in the money" when the A. market price of the security exceeds the exercise price.B. market price of the security equals the exercise price.C. market price of the security is less than the exercise price.D. premium on the option is less than the exercise price.1. Discuss moral philosophy and its role in business ethics 2. Differentiate idealism vs. realism. Give exampleDoes the risk correspond to the dispersion, or uncertainty, impossible outcomes?
- Economics 2. Suppose that a farmer usually makes profit of $120,000 per year. Let's say that there is a 2% chance that a tornado will hit the farm. This would strongly hurt farmer's profit, leading to losses of $96,000 with 2% probability. a. What is the actuarially fair insurance? b. Assume that the farmer utility is given by u = 7 0.5 where 7t represents profit. What is the farmer's expected utility with no insurance? c. How much would the farmer be willing to pay to have insurance? d. Assume that the farmer expects that the tornado's effect to your farm is lower, only leading to losses of $70,000. i. What is the actuarially fair insurance? ii. What is the farmer's expected utility with no insurance? iii. How much would the farmer be willing to pay to have insurance? iv. What is the risk premium?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.What term do economists use to describe the tendency for people to prefer certain outcomes over risky situations? a. The precautionary principle b. Risk differentiationc. Risk uncertainty d. Risk aversion e. Risk management
- The key concept that explains why individuals choose to obtain insurance and why they may be less likely to gamble with their wealth is: a. increasing marginal utility in wealth b. constant marginal utility in wealth c. decreasing marginal utility in wealthDon't use chatgpt1. 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.