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A charter school operator gets utility out of the number of students she enrolls, where U = students0.7 . She cannot perfectly predict the number of students. However, her best guess is that with probability 0.75, she will enroll 100, and with probability 0.25, she will enroll 25. a) What is her expected utility? b) Graph her utility curve, plot the two possible income/utility combinations given above, and label the following items: expected utility, certainty equivalent, and risk premium. c) Calculate the certainty equivalent

A charter school operator gets utility out of the number of students she enrolls, where U = students0.7 . She cannot perfectly predict the number of students. However, her best guess is that with probability 0.75, she will enroll 100, and with probability 0.25, she will enroll 25. a) What is her expected utility? b) Graph her utility curve, plot the two possible income/utility combinations given above, and label the following items: expected utility, certainty equivalent, and risk premium. c) Calculate the certainty equivalent

ENGR.ECONOMIC ANALYSIS
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 charter school operator gets utility out of the number of students she enrolls, where U = students0.7 . She cannot perfectly predict the number of students. However, her best guess is that with probability 0.75, she will enroll 100, and with probability 0.25, she will enroll 25. a) What is her expected utility? b) Graph her utility curve, plot the two possible income/utility combinations given above, and label the following items: expected utility, certainty equivalent, and risk premium. c) Calculate the certainty equivalent d) Calculate the risk premium.
Transcribed Image Text:A charter school operator gets utility out of the number of students she enrolls, where U = students0.7 . She cannot perfectly predict the number of students. However, her best guess is that with probability 0.75, she will enroll 100, and with probability 0.25, she will enroll 25. a) What is her expected utility? b) Graph her utility curve, plot the two possible income/utility combinations given above, and label the following items: expected utility, certainty equivalent, and risk premium. c) Calculate the certainty equivalent d) Calculate the risk premium.
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