Janet's broad attitude to risk (risk averse, risk neutral, or risk loving) is independent of her wealth. She has initial wealth w and is offered theopportunity to buy a lottery ticket. If she buys it, her final wealth will be either w + 4 or w – 2, each equally likely. She is indifferent betweenbuying the ticket and not buying it.Janet offers her friend Sam (who has identical preferences and initial wealth) the following proposition:They buy the ticket together, and share the cost and proceeds equally.Should Sam accept the offer?O a. Yes, Sam should accept the offer.O b. No, Sam should reject the offer.O c. Sam would be indifferent between accepting an rejecting the offer.O d. There is not enough information to determine if Sam should accept or reject the offer.

Janet's broad attitude to risk (risk averse, risk neutral, or risk loving) is independent of her wealth. She has initial wealth w and is offered the opportunity to buy a lottery ticket. If she buys it, her final wealth will be either w + 4 or w – 2, each equally likely. She is indifferent between buying the ticket and not buying it.

Janet's broad attitude to risk (risk averse, risk neutral, or risk loving) is independent of her wealth. She has initial wealth w and is offered the opportunity to buy a lottery ticket. If she buys it, her final wealth will be either w + 4 or w – 2, each equally likely. She is indifferent between buying the ticket and not buying it.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Veer
Lucy and Henry each have $1652. Each knows that with 0.1 probability, they will lose 85% of their wealth. They both have the option of buying a units of insurance, with each unit costing $0.1. Each unit of insurance pays out $1 in the event the loss occurs. The cost of the insurance policy is paid regardless of whether the loss is incurred. Lucy's utility is given by u²(x) = x, Henry's utility is given by u¹(x) = √√x. Answer the following: (If rounding is needed, only round at the end and write your answer to three decimal places.) a) Without insurance, what is the expected value of the loss? b) c) d). e) ( For Henry, facing the "lottery " above without any insurance is as bad as losing how many dollars for sure? Find Lucy's utility maximising choice of a. If more than 1 exist, enter the largest a. Now suppose insurance costs $0.2. Find Lucy's utility maximising choice of a. If more than 1 exist, enter the largest a. What is Henry's utility maximising choice of a with the new price of…
Any risk-averse individual would always (Select all that applies) a) take a 30% chance at $100 rather than a sure $20. b) take a sure $20 rather than a 30% chance at $100. c) take a sure $2 rather than a 50% chance at $5 and a 50% chance at losing $1. d) take a 50% chance at $5 and a 50% chance at losing $1 rather than a sure $1.
Janet’s broad attitude to risk (risk averse, risk neutral, or risk loving) is independent of her wealth. She has initial wealth w and is offered the opportunity to buy a lottery ticket. If she buys it, her final wealth will be either w+4 or w−2, each equally likely. She is indifferent between buying the ticket and not buying it. Janet offers her friend Sam (who has identical preferences and initial wealth) the following proposition: They buy the ticket together, and share the cost and proceeds equally. Sam has another idea: They buy two tickets (that have independent outcomes) and share the costs and proceeds equally. Suppose that Janet's and Sam's utility of income is given by u(x)=ln⁡x and the initIal wealth of each one of them is equal to w=4. Recall the proposal made by Janet, and the solution put forward by Sam. Which of the following statements is true? a. Both agents prefer Sam's solutions to Janet's solution. b. Both agents prefer Janet's solutions to Sam's solution.…
Roger's utility/u as a function of wealth/w is u = { ln w, w < 1600 w1/2, w >= 1600 Roger has $1000 and 3 options. 1. spend $400 to enter the game with probabilities of winning or losing: Win/(Lose) (500) 0 1000 3000 P(Win/(Lose)) 0.2 0.1 0.6 0.1 a. Show with workings which option roger would choose.
Suppose Alex’s utility function is u ($x) = √x. Assume her initial wealth is 0. Is it possible that Alex’s expected utility from the prospect equals $5, why? What is the possible range of Alex’s expected utility?
please answer the question below as soon as possible, please!
David is an expected-utility maximizer that likes to drive fast (and reckless at times), so his probability of an accident is 2/3. David's preferences over wealth are u(w) = vw. Suppose that David's initial wealth is $100. If David has an accident, he incurs a $51 loss. How much is the risk premium David willing to pay to be as well off in case of accident or not?
Suppose that • The employee has an outside offer to work for $27 per hour, for 1500 hours per year The employee currently works for $20 per hour, for 2000 hours per year The switching cost can be either high ($1'000) or low ($50) • The high switching cost has probability 40%; the low switching cost 60% Suppose that the cost of losing the employee is $800. What is the employer expected payoff from choosing not to match the outside offer?
An investor has preferences represented by a utility function u(c) and initial wealth w > 0. Consider an asset that pays G with probability \pi and B with probability 1-\pi. 1.1 Suppose the investor owns this asset. What is the minimum price he would sell it for? (It is sufficient to formulate the condition that this price must satisfy). 1.2 Suppose he does not own it. What is the maximum price he would be willing to pay to buy it? (It is sufficient to formulate the condition that this price must satisfy). 1.3 Explain why (or under which conditions) the buy and sell prices you have found are or are not the same. 1.4 Suppose w = 10, G = 10, B = 5 and u(c) = √c. Compute the buy and sell prices.
9. Problems and Applications Q9 Dmitri has a utility function U = W, where W is his wealth in millions of dollars and U is the utility he obtains from that wealth. In the final stage of a game show, the host offers Dmitri a choice between (A) $4 million for sure, or (B) a gamble that pays $1 million with probability 0.4 and $9 million with probability 0.6. Use the blue curve (circle points) to graph Dmitri's utility function at wealth levels of $0, $1 million, $4 million, $9 million, and $16 million. Utility (Thousands) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 0 2 4 8 6 10 12 14 Wealth (Millions of dollars) 16 18 20 V Utility Function ?
1 Q1. Jerry has wealth of $60 and derives utility from this according to the utility function U(w) = 1 - Where w is his wealth. Jerry now finds a lottery ticket (the drawing takes place the next day) that offers a 50% chance of winning $5. W a) What is the expected value of Jerry if he takes the lottery ticket? (pay attention, it's not jerry's wealth) b) What is the minimum amount for which Jerry would be willing-to-sell the ticket? (Hint: sets a price of p, and at the minimum amount, the expected utility of selling and not selling should be the same) c) Which is bigger, your answer to (a) or (b), and suggest whether Jerry is a risk averse person based on the previous conclusion? d) If he does not sell the ticket, what is Jerry's cost of risk? (The cost of risk is the difference between the expected wealth and the certainty equivalence)