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
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.8P
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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.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F35397990-9ffc-4978-94eb-9b5e82b44515%2Fc0741437-25c2-4693-a69c-890fc4b4394d%2F8refqi_processed.jpeg&w=3840&q=75)
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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