A decision maker has a utility function for monetary gains x given by U(x) = (x + 10,000)1/2. (a) Show that the person is indifferent between the status quo and L: With probability 1/3, he or she gains $80,000 With probability 2/3, he or she loses $10,000 (b) Suppose that this person has a painting. If there is a 10% chance that the painting valued at $10,000 will be stolen during the next year, what is the maximum amount (per year) that he/she would be willing to pay for insurance covering the loss of the painting? • What is certainty equivalent? • What is risk premium? (c) Is this person risk-averse, risk-neutral, or risk-taker? Why?

A decision maker has a utility function for monetary gains x given by U(x) = (x + 10,000)1/2. (a) Show that the person is indifferent between the status quo and L: With probability 1/3, he or she gains $80,000 With probability 2/3, he or she loses $10,000 (b) Suppose that this person has a painting. If there is a 10% chance that the painting valued at $10,000 will be stolen during the next year, what is the maximum amount (per year) that he/she would be willing to pay for insurance covering the loss of the painting? • What is certainty equivalent? • What is risk premium? (c) Is this person risk-averse, risk-neutral, or risk-taker? Why?

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Description: A decision maker has a utility function for monetary gains x given by U(x) = (x + 10,000)1/2. (a) Show that the person is indifferent between the status quo and L: With probability 1/3, he or she gains $80,000 With probability 2/3, he or she loses $

A First Course in Probability (10th Edition)

10th Edition

ISBN:9780134753119

Author:Sheldon Ross

Publisher:Sheldon Ross

Chapter1: Combinatorial Analysis

Section: Chapter Questions

Problem 1.1P: a. How many different 7-place license plates are possible if the first 2 places are for letters and...

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Concept explainers

Contingency Table

A contingency table can be defined as the visual representation of the relationship between two or more categorical variables that can be evaluated and registered. It is a categorical version of the scatterplot, which is used to investigate the linear relationship between two variables. A contingency table is indeed a type of frequency distribution table that displays two variables at the same time.

Binomial Distribution

Binomial is an algebraic expression of the sum or the difference of two terms. Before knowing about binomial distribution, we must know about the binomial theorem.

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