A gamble based on a fair coin toss which pays $6.65 if the coin lands heads and $9.85 if the coin lands tails. ( fair coin tossi.e. probability of heads is 50% = probability of tails EV $8.25 E[U(w)] UJEV) risk attitude ><= w (w) (w) 624,81 $ 561.51 EU_>_U(EV) Low 136.25 $ EU_=_U(EV) Neutral EU = U(EV) Neutral 125+w 136.25 (w) Sin(w) 10.50 $ 10.50 Arisk agent, whose utility is given by U(w) = 5In(W) and initial vealth is $5,000 is faced with a potential loss of $3,800 with a probability of p=D0.17. What is the maximum premium they would be willing to pay to orotect themselves against this loss? isk appetite EV EU J(w-y) = E[U(w)] EIn(5,000-y)=B17 ind y U"(w) <0 intial wealth 41.37 5,000 y= 1,077.13 If you are given the opportunity to buy insurance for $500 alt y= would you take the insurance? Utility functions w>0 (w) (w) "(w) w-9w u(w) 5ln(w) u'(w) u"(w) (w): >,<=0 '(w) : >,<=0 A'(w) :>,<,=0 R'(w) :><,=0
A gamble based on a fair coin toss which pays $6.65 if the coin lands heads and $9.85 if the coin lands tails. ( fair coin tossi.e. probability of heads is 50% = probability of tails EV $8.25 E[U(w)] UJEV) risk attitude ><= w (w) (w) 624,81 $ 561.51 EU_>_U(EV) Low 136.25 $ EU_=_U(EV) Neutral EU = U(EV) Neutral 125+w 136.25 (w) Sin(w) 10.50 $ 10.50 Arisk agent, whose utility is given by U(w) = 5In(W) and initial vealth is $5,000 is faced with a potential loss of $3,800 with a probability of p=D0.17. What is the maximum premium they would be willing to pay to orotect themselves against this loss? isk appetite EV EU J(w-y) = E[U(w)] EIn(5,000-y)=B17 ind y U"(w) <0 intial wealth 41.37 5,000 y= 1,077.13 If you are given the opportunity to buy insurance for $500 alt y= would you take the insurance? Utility functions w>0 (w) (w) "(w) w-9w u(w) 5ln(w) u'(w) u"(w) (w): >,<=0 '(w) : >,<=0 A'(w) :>,<,=0 R'(w) :><,=0
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
![Agamble based on a fair coin toss which pays $6.65 if the coin lands heads and $9.85 if the coin lands tails. (fair coin toss i.e. probability of heads is 50% = probability of tails is 50%)
EV
$8.25
E[U(w))
UJEV]
><=
risk attitude
EU_>_U(EV) Low
EU = U(EV) Neutral
EU =_U(EV) Neutral
u(w)
w"
624.81 $
561.51
u(w)
125+w
136.25 $
136.25
u(w)
Sin(w)
10.50 $
10.50
Arisk agent, whose utility is given by U(w) = 5In(W) and initial
wealth is $5,000 is faced with a potential loss of $3,800 with a probability
of p=0.17. What is the maximum premium they would be willing to pay to
protect themselves against this loss?
risk appetite
(wייט
EV
intial wealth
EU
41.37
5,000
U(w-y) = E[U(w)]
5In(5,000-y)=B17
find y
y= $
1,077.13 If you are given the opportunity to buy insurance for $500
alt y=
would you take the insurance?
Utility functions w>0
u(w)
w-9w
u(w)
5In(w)
u'(w)
u'(w)
u"(w)
u"(w)
A'(w) :>,<,=0
A'(w) :>,<,=0
R'(w) : >,<,=0
R'(w) :>,<=0
show your work
A(w)
Alw)
A'(w)
A'(w)
R(w)
R(w)
R'(w)
R'(w)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa0bdac84-7a6d-4ea3-9c7d-5b5017d5bd43%2F41f08078-22bc-4909-ac31-922af38e90e3%2Fqb0ttud_processed.png&w=3840&q=75)
Transcribed Image Text:Agamble based on a fair coin toss which pays $6.65 if the coin lands heads and $9.85 if the coin lands tails. (fair coin toss i.e. probability of heads is 50% = probability of tails is 50%)
EV
$8.25
E[U(w))
UJEV]
><=
risk attitude
EU_>_U(EV) Low
EU = U(EV) Neutral
EU =_U(EV) Neutral
u(w)
w"
624.81 $
561.51
u(w)
125+w
136.25 $
136.25
u(w)
Sin(w)
10.50 $
10.50
Arisk agent, whose utility is given by U(w) = 5In(W) and initial
wealth is $5,000 is faced with a potential loss of $3,800 with a probability
of p=0.17. What is the maximum premium they would be willing to pay to
protect themselves against this loss?
risk appetite
(wייט
EV
intial wealth
EU
41.37
5,000
U(w-y) = E[U(w)]
5In(5,000-y)=B17
find y
y= $
1,077.13 If you are given the opportunity to buy insurance for $500
alt y=
would you take the insurance?
Utility functions w>0
u(w)
w-9w
u(w)
5In(w)
u'(w)
u'(w)
u"(w)
u"(w)
A'(w) :>,<,=0
A'(w) :>,<,=0
R'(w) : >,<,=0
R'(w) :>,<=0
show your work
A(w)
Alw)
A'(w)
A'(w)
R(w)
R(w)
R'(w)
R'(w)
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