27. Mr. X has an exogenous income W and his utility from consumption c is u(c). Mr. X knows that an accident can occur with probability p and if it occurs, the monetary equivalent to the damage is T. Mr. X can however affect the accident probability p through the prevention effort e. In particular, e can take two values - zero and a and an assumption is that p(0) > p(a), that is by putting prevention effort, probability of occurring an accident can be reduced. Let us also assume that if Mr. X puts an effòrt e, the disutility from the effort is Ae2 where A is the per unit effort cost. What iş the critical value of A, A*, below which the effort will be undertaken, and above which the effort will not be undertaken, by Mr. X ? (a) A* = P(@)-p(0)|[u(W-T)-u(W)] a2 (b) A* = p(a)-p(0)]a? [u(W-T)-u(W)| %3D p(a) 4 p(0) (W-T) 4(W) (с) A* (d) A*: p(a)p(0)a² u(W-T)u(W) ||
27. Mr. X has an exogenous income W and his utility from consumption c is u(c). Mr. X knows that an accident can occur with probability p and if it occurs, the monetary equivalent to the damage is T. Mr. X can however affect the accident probability p through the prevention effort e. In particular, e can take two values - zero and a and an assumption is that p(0) > p(a), that is by putting prevention effort, probability of occurring an accident can be reduced. Let us also assume that if Mr. X puts an effòrt e, the disutility from the effort is Ae2 where A is the per unit effort cost. What iş the critical value of A, A*, below which the effort will be undertaken, and above which the effort will not be undertaken, by Mr. X ? (a) A* = P(@)-p(0)|[u(W-T)-u(W)] a2 (b) A* = p(a)-p(0)]a? [u(W-T)-u(W)| %3D p(a) 4 p(0) (W-T) 4(W) (с) A* (d) A*: p(a)p(0)a² u(W-T)u(W) ||
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.8P
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