8. Suppose that the world can be described using two states and two stocks Yand 2are available. We assume the stocks' future prices have the following distributionStateFuture Prices Stock YFuture Prices Stock Z$10$20$15$111The initial prices for the stocks are: Y(1) = $13, Z(1) = $10. Our utilityfunction in (w1, w2) space is U(w1, w2) = w1 X w2, where U represents theutility level. Now we have an initial endowment of $420. How many shares andwhat positions of Y and Z should we choose to build our portfolio so that weactually maximize our utility function? (Assume fractional shares are permitted.)%3DWhot oMO

We need to allocate $420 such that we are able to gain irrespective of future state...

8. Suppose that the world can be described using two states and two stocks Yand 2 are available. We assume the stocks' future prices have the following distributions State Future Prices Stock Y Future Prices Stock Z $15 $11 1 $10 $20 The initial prices for the stocks are: Y(1) $13, Z(1) = $10. Our utility function in (wl, w2) space is U(w1, w2) = w1 X w2, where U represents the utility level. Now we have an initial endowment of $420. How many shares and what positions of Y and Z should we choose to build our portfolio so that we actually maximize our utility function? (Assume fractional shares are permitted.) Whot

8. Suppose that the world can be described using two states and two stocks Yand 2 are available. We assume the stocks' future prices have the following distributions State Future Prices Stock Y Future Prices Stock Z $15 $11 1 $10 $20 The initial prices for the stocks are: Y(1) $13, Z(1) = $10. Our utility function in (wl, w2) space is U(w1, w2) = w1 X w2, where U represents the utility level. Now we have an initial endowment of $420. How many shares and what positions of Y and Z should we choose to build our portfolio so that we actually maximize our utility function? (Assume fractional shares are permitted.) Whot

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.10P

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Q1. A farmer believes there is a 50-50 chance that the next growing season will be abnormally rainy. His expected utility function has the form Expected utility = 0.5lnYNR + 0.5lnYR Where and represent the farmers income in the state of ‘normal rain’ and ‘rainy’ respectively. Suppose the farmer must choose between two crops that promise the following income prospects Crop YNR YR Wheat $83,000 $10,000 Maize $83,000 $15000 What mix of wheat and maize would provide maximum expected utility to this farmer?
ayesha derives utility from travelling and outdoor dinning o weekends as given utility function U(t,d)=TD.the price of a day spent travelling is $160{Pt=160} and price of dining outdoor $200{Pd=200}.ayesha annual budget for this is $8000. find ayesha's utility maximizing choice of days travelling and dining outside. and alsoo find uutility level from consuming that bundles .show findings graphically
1. A woman with current wealth X has the opportunity to bet an amount on the occurrence of an event that she knows will occur with probability P. If she wagers W, she will received 2W, if the event occur and o if it does not. Assume that the Bernoulli utility function takes the form u(x) = -e-rx with r>0. How much should she wager? Does her utility function exhibit CARA, DARA, IARA?
5. Consider a decision-maker who expects to have a car accident with chance ; if this occurs, he will incur $L in damages. He can purchase as much auto insurance, q, as he likes, at a price of p per dollar of coverage: this means that if he pays pq upfront (as the insurance premium), he'll receive a payment of q from the insurance company if an accident occurs. (a) Write out his expected utility from purchasing insurance level q, assuming a utility-of- wealth function u(w) and initial wealth wo. 1 (b) Show that the optimal level of insurance, q, solves u' (wo - L + (1 - p)q)) u' (wo - pq) = p(1 - π) T(1-P) (c) Now assume that u(w) 1 - e-aw, where a > 0 (this is known as a "CARA", or "constant absolute risk aversion", utility function; a parametrizes risk aversion). Solve explicitly for the optimal insurance, and show that it does not depend on wealth.
1. A standard model of choice under risk is Expected Utility Theory (EUT) in which preferences over lotteries that pay monetary prizes (x₁, x2, ..., xs) with probabilities (P1, P2, ..., Ps) with Eps = 1 are represented by the function L S (a) What does it mean to say that a function represents the consumer's prefer- ences? Σpsu(xs) Choice 1 8=1 (b) State and briefly comment on the axioms required for the EUT representation. (c) Consider the following experiment of decision making under risk in which sub- jects are asked which lottery they prefer in each of the following two choices: Lottery B 0 with prob. 0.01 10 with prob. 0.89 50 with prob. 0.10 Lottery D Choice 2 Lottery A 0 with prob. 0 10 with prob. 1 50 with prob. 0 Lottery C 0 with prob. 0.90 10 with prob. 0 50 with prob. 0.10 Suppose that the modal responses are Lottery A in Choice 1 and Lottery D in Choice 2. Assume that utility of zero is equal to zero and illustrate why it is not possible to reconcile these experimental…
7.7 A farmer believes there is a 50-50 chance that the next growing season will be abnormally rainy. His expected utility function has the form 1 expected utility =In n YNR +In YR, where YNR and YR represent the farmer's income in the states of “normal rain" and “rainy," respectively. a. Suppose the farmer must choose between two crops that promise the following income prospects: Crop YNR YR Wheat $28,000 $10,000 $15,000 Corn $19,000 Which of the crops will he plant? b. Suppose the farmer can plant half his field with each crop. Would he choose to do so? Explain your result. c. What mix of wheat and corn would provide maximum expected utility to this farmer? d. Would wheat crop insurance-which is available to farmers who grow only wheat and which costs $4,000 and pays off $8,000 in the event of a rainy growing season-cause this farmer to change what he plants?
Im confused on how to complete this
6. Are the following utility functions consistent with the axioms of the expected utility theorem? Everything is in monetary terms. (a) u(x) = = -x. (b) u(x) = x² for a E (-10, 10]. (c) u(x) = 5. %3D
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