According to this graph of your utility function would you be considered risk-averse or a risk-taker? Why? Risk averse because of increasing marginal utility of income Risk taker because of increasing marginal utility of income O Risk taker because of diminishing marginal utility of income O Risk averse because of diminishing marginal utility of income

According to this graph of your utility function would you be considered risk-averse or a risk-taker? Why? Risk averse because of increasing marginal utility of income Risk taker because of increasing marginal utility of income O Risk taker because of diminishing marginal utility of income O Risk averse because of diminishing marginal utility of income

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose that the expected value of weekly profits for an ice cream shop, before paying the manager, Amy, is where e is Amy's weekly avertime hours. Amy is risk-neutral but incurs a cost for working overtime. Thus, tatal expected surplus is What level of effort maximizes total surplus? The value of overtime that maximizes total surplus is e-hours. (Enter your response rounded to one decimal place.) E(x)=500+10c C(e)=² E(S)-[(x)-C(e).
3. In the second example, we will consider the case where the insurance contract involves a deductible this is an amount which is deducted from the final pay-out of the insurance firm in the case of a loss. In other words, the consumer bears this part of the loss herself. For this problem, assume a risk-averse, expected utility maximizing consumer with initial wealth wo who faces a potential loss of size L which will occur with probability p. Her utility-of-final-wealth function is denoted by u(.). Suppose that the consumer can purchase insurance coverage of C > 0 units of wealth from a perfectly competitive insurance firm at a premium of 7 per unit of coverage, but that the firm charges an additive deductible: if C units of insurance is purchased, the insurance firm pays out (C – d) if the loss occurs, where d 20 is a fixed amount independent of C. (a). For this problem, state the consumer's expected utility function. (b). Set up the consumer's utility maximization problem and find…
Suppose that Natasha's utility function is given by u(I) = √/10/, where I represents annual income in thousands of dollars. Is Natasha risk loving, risk neutral, or risk averse? Explain. A. She is risk averse because her utility function exhibits diminishing marginal utility. OB. She is risk loving because her utility function exhibits increasing marginal utility. OC. She is risk neutral because her utility function exhibits constant marginal utility. Suppose that Natasha is currently earning an income of $40,000 (1 = 40) and can earn that income next year with certainty. She is offered a chance to take a new job that offers a 0.6 probability of earning $44,000 and a 0.4 probability of earning $33,000. Should she take the new job? Natasha should not take the new job because her expected utility of 19.85 is less than her current utility. (Round expected utility to three decimal places.)
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Suppose that 20 risk neutral competitors participate in a rent seeking game with a fixed prize of $500. Each player may invest as much money as he wishes in the political contest. The probability of winning is directly proportional to the candidate's share of the total rent-seeking investment. 1. What is the expected net benefit of a player if all other players invest $20 each? Write the net benefit as a function of the player's investment. 2. Solve the maximization problem to arrive at the profit-maximizing investment. Round to the nearest cent.
Are the following preferences consistent with von Neumann Morgenstern’s axioms to maximize expected utility? Explain. a. You would rather have a sure $200 to a gamble with p=0.7 chance of $200, p=0.1 chance of $50, p=0.2 chance of $300. b. You prefer the gamble of p=2/3 chance of $300 and p=1/3 chance of $50 than a sure $250 win.
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Who is most risk-averse? a-an individual with slightly diminishing marginal utility. b-all individuals are equally risk-averse. c-an individual with rapidly diminishing marginal utility. d-an individual who does not experience diminishing marginal utility.
(d) Suppose Antonio has utility function over wealth given by Va (y) = Vy and suppose Dillon has the following utility function over wealth: va (y) = In %3D Who is more risk aversc, Antonio or Dillon? Show this using two approachcs. (e) Who is more risk averse, Chelsca or Dillon'? Explain.
5. Understanding risk aversion Suppose your friend Juanita offers you the following bet: She will flip a coin and pay you $1,000 if it lands heads up and collect $1,000 from you if it lands tails up. Currently, your level of wealth is $3,000. The graph shows your utility function from wealth. Use the graph to answer the following questions. UTILITY (Units of utility) 100 90 80 70 60 50 40 30 20 10 0 0 A+ C B WEALTH (Thousands of dollars)