Mike has a utility function expressed by U(W)= WO.5 where W stands for wealth (assuming wealth is positive, i.e. W>0), and U(W) is the utility given a certain level of W. Mike has initial wealth of $10,000. Mike feels that he faces the following probability distributions of losses with respect to his wealth: Loss Amount ($) Probability $0 $1,000 $8,000 70% 20% 10% Is Mike a risk averse person?
Q: Suppose that you have two opportunities to invest $1M. The first will increase the amount invested…
A: Utility function = 2.3ln(1+4.5x) First opportunity : Returns = + or - 50% Probability of gain =…
Q: Question 14 Sioned has a utility function of the formu(W) = ln(W). What is her coefficient of…
A: The Arrow-Pratt absolute risk aversion coefficient is given as: a = -u''(w)u'(w)Where u''(w) is the…
Q: Jan wealth W = 100, has a utility function with respect to wealth of U = .5W^(2) , and faces a…
A: Given: U=0.5W^(2)
Q: Andrew is considering taking one of two jobs. The first job pays $90,000 as base pay, but there is a…
A: First Job Option :Base Pay = 90,000Bonus = 54000Probability of bonus = 25%Second Job Option :Fix Pay…
Q: An entrepreneur has a venture that will make either $100M or $0. The chance that this venture will…
A: Answer (A) If the entrepreneur tries hard her expected utility is
Q: A person has an expected utility function of the form u(w) = w0.5 . He initially has wealth of $4.…
A: In economics, utility refers to the level of satisfaction that a consumer gets from the consumption…
Q: Consider two individuals, Dave and Eva. Both Dave and Eva have initial wealth 810, 000 and face a…
A: In the study of economics, the term utility can be defined as the total satisfaction or benefit that…
Q: You can invest in asset A, which offers a riskless payoff of $15,000 or in asset B, which pays…
A: In economics, the term "utility" describes the overall enjoyment or gain from consuming a good or…
Q: You are currently a worker earning $60,000 per year but are considering becoming an entrepreneur.…
A: Given; Worker's earning per year= $60,000 Annual cost of labor= $150,000 Annual cost for rent=…
Q: Assume that Mary’s utility function is U(W) = W1/3, where W is wealth. Suppose that Mary has an…
A: A risk premium is the additional return or compensation that an individual requires to take on…
Q: Leo owns one share of Anteras, a semiconductor chip company which may have to recall millions of…
A: The stock price is the current value of stock for buyers and sellers.
Q: Assume that your utility has a natural log function U(W)=ln(W), which is a concave function. Your…
A: Loss mitigation refers to the action made by a party to lessen the likelihood that a loss would…
Q: Jacob is considering buying hurricane insurance. Currently, without insurance, he has a wealth of…
A: Jacab hs utility function U(W)=ln(W) The initial wealth he has is $80,000 and loss form event is…
Q: You have a log utility, U = In(W), where W is your wealth. Currently, you own $1,000. You are given…
A: Utility:The utility is want satisfying power of a commodity. It can be expressed in cardinal and…
Q: Question 1) An expected utility maximiser owns a car worth £60000 and has a bank account with…
A: Note:- “Since you have asked multiple question, we will solve the first question for you. If you…
Q: An art dealer owns a painting worth $1,600,000, and this dealer has an expected utility function…
A: The highest price a person is willing to pay for insurance is the price at which a person is…
Q: Your utility function is U = w0.4, where W is your wealth. Your current wealth is $800. There is a…
A: Given Total wealth =$800 and there is 0.25 chances that we will suffer a loss of $600 We have to…
Q: Yuri owns just one ship, he calls it Previt. The ship is worth $25 million dollars. If the ship…
A: Insurance provides coverage over the risk. For claiming insurance people need to pay the premium and…
Q: Amy likes to go fast in her new Mustang GT. Their utility function over wealth is v(w) where w is…
A: We are going to find he expected utility for Anna in both scenarios when she is insured and she…
Q: Angie owns an endive farm that will be worth $90,000 or $0 with equal probability. Her Bernouilli…
A: As given in question: (a)Angie farm wealth (w1) = $90.000 When every thing goes wrong farm wealth…
Q: Assume that Rosemarie has the following utility function: U(W) = W1/2. She is selling her home and…
A: Expected utility is a concept used in decision theory to measure the satisfaction or utility that an…
Q: Suppose you visit with a financial adviser, and you are considering investing some of your wealth in…
A: Risk Averse: Someone who avoids taking risks and prioritises safety is said to be risk-averse. They…
Q: (a) Is Bill risk-averse, risk-loving, or risk-neutral? Explain. (b) If Bill could buy insurance to…
A: We need to look at Bill's utility function and his response to risk to establish if he is…
Q: You are considering a $500,000 investment in the fast-food industry and have narrowed your choice to…
A: Investment alludes to the allocation of money, resources, or capital with the expectation of…
Q: A small bakery serves very popular fresh meat pies every day. The cost of making each pie is $2, and…
A: The breakeven point in business signifies a crucial equilibrium where the total revenue generated…
Q: Q2. Bob's wealth is $2500. However, he faces a 50% chance of suffering a $900 loss. His utility…
A: utility addresses the satisfaction that purchasers/consumers get for consuming a decent or…
Q: You have $1,000 that you can invest. If you buy Ford stock, you face the following returns and…
A: The expected return is how much benefit or misfortune a financial backer can expect to get on…
Q: 8. Risk and return Suppose Frances is choosing how to allocate her portfolio between two asset…
A: An investment is an asset or item obtained determined to create income or appreciation. Appreciation…
Q: Mike has the following utility function: u(w) In(w) where wealth is in units of 1,000 Order the…
A: Expected utility is the weighted sum of utility obtained under different circumstances. Different…
Q: You have a house worth 300,000. A fire will burn everything to the ground and leave $0 in value.…
A: According to the question, it is concluded that : There's a house worth 300,000 A fire will burn…
Q: 1. George maximizes expected utility and he has a von-Neumann-Morgenstern utility function u (c) =…
A: Utility = c1/2 Initial Wealth = $1000 success rate = 9% If successful then payoff = $100,000 Payoff…
Q: Suppose every driver faces a 1.5% probability of an automobile accident every year, and on an…
A: LET A BE THE EVENT THAT ACCIDENT TAKES PLACE AND B BE THE EVENT THAT ACCIDENT DOESN'T TAKE…
Q: You are currently a worker earning $60,000 per year but are considering becoming an entrepreneur.You…
A: Total Cost = 150000+50000+40000 = $240000 There are two scenarios possible: Low revenue scenario…
Q: Suppose that you graduate from college next year and you have two career options: 1) You will start…
A: Hey champ,Welcome to this platform. Here you will get the answer with better quality in minimum…
Q: Suppose a company is offering insurance where your premium is $500 and your payout is $2000. What…
A: We are going to get the payout with probability 0.2 but we have to pay premium in both the states.
Q: Consider a person with the following utility function over wealth: u(w) = ew, where e is the…
A: “Since you have posted a question with multiple sub-parts, we will solve the first three sub-parts…
Q: 4) Consider investors with preferences represented by the utility function U E(r) – Ao². (a) Draw…
A: An indifference curve (IC) is a graphical representation of various combinations of consumption…
Q: Using the Utility Function in Portfolio Management, where the utility function is the constant…
A: The certainty equivalent is a return that is assured and somebody would prefer to receive now over…
Q: Janet's broad attitude to risk (risk averse, risk neutral, or risk loving) is independent of her…
A: Here, Janet's decision and Sam's idea give different utility and outcome when they decide to buy…
Q: Nick is risk averse and faces a financial loss of $40 with probability 0.1. If nothing happens, his…
A: Since you have asked multiple questions, we will solve the first question for you. If you want any…
Q: For constants a and b, 0 < b, b 1, and expected profit E(p), the expected utility function of a…
A: Given information a and b are constant b>0 Person is risk-neutral.
Q: A client (the principal) is trying to determine the best possible contract to enter into with her…
A: Risk aversion is the propensity for people to choose outcomes with low uncertainty over those with…
Q: (a) Will this individual participate in the lottery? (b) Calculate this individual's certainty…
A: It deals with decision-making under uncertainty, which is a central concept in the field of…
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
- Adam is considering what skills to study in online school. Her utility function is based on the income she earns, and is defined by U(I) = I0.8. If she learns the skill of SPSS, she will earn $145,000 per year with probability 1. If she learns the skill of Tableau, she will earn $300,000 per year with probability 0.6 (assuming that she gets the certificate) and $30,000 with probability 0.4 (if she learns without earning a certificate and she has to find a waiter job). a. Is she risk averse, risk neutral, or risk loving? Explain.b. Write out the equation for her expected utility for each skill. c.Which skill will she learn? Show your work. d.Suppose someone offers her insurance for the possibility that she does not get a Tableau certificate. This insurance will provide her an amount of income in addition to the waiter job wages that makes her indifferent between learning SPSS and Tableau. What is this amount, and what is the cost of the insurance? (note: many possible answers)You now have constructed a utility function that measures how much you value having total assets worth x dollars (x ≥ 0). This utility function is U(X)=√x. Compare the utility of reducing your total assets next year by the cost of the earthquake insurance with the expected utility next year of not taking the earthquake insurance. Should you take the insurance?19. An individual has initial wealth Wo = 3 and has the opportunity to invest some quantity of money x in an extremely risky corporate bond. With probability p= 1/4, the bond will be worth 10x at maturity. With probability 1 – p, it will be worth zero. The individual's utility function over final wealth is u(W) = W0.5. What is the level of investment x that maximizes expected utility? (а) 0 (b) 1 (c) 4/3 (d) V3 (e) 2
- AsapYou need to hire some new employees to staff your startup venture. You know that potential employees are distributed throughout the population as follows, but you can't distinguish among them: Employee Value $30,000 $49,000 $68,000 $87,000 Probability 0.25 0.25 0.25 0.25 The expected value of hiring one employee is $ Suppose you set the salary of the position equal to the expected value of an employee. Assume that employees will not work for a salary below their employee value. The expected value of an employee who would apply for the position, at this salary, is $ Given this adverse selection, your most reasonable salary offer (that ensures you do not lose money) isThe value of a successful project is $420,000; the probabilities of success are 1/2 with good supervision and 1/4 without. The manager is risk neutral, not risk averse as in the text, so his expected utility equals his expected income minus his disutility of effort. He can get other jobs paying $90,000, and his disutility for exerting the extra effort for good supervision on your project is $100,000. (a) Show that inducing high effort would require the firm to offer a compensation scheme with a negative base salary; that is, if the project fails, the manager pays the firm an amount stipulated in the scheme. (b) How might a negative base salary be implemented in reality? (c) Show that if a negative base salary is not feasible, then the firm does better to settle for the low-pay, low-effort situation.
- Natalie entered a raffle recently and never checked her tickets. She has recently learned the exact number of the other unchecked tickets. Based on this information she knows that there is a 30% chance that she has won the raffle prize of $1,600. If she does not win the raffle her wealth will be zero. Natalie has a von Neumann- Morgenstern utility such that she wants to maximize the expected value of cvc, where cc is total wealth. What is the minimum price for which Natalie would sell her raffle tickets? $You plan to invest $1,000 in a corporate bond fund or in a common stock fund. The following table represents the annual return (per $1,000) of each of these investments under various economic conditions and the probability that each of those economic conditions will occur. Compute the expected return for the corporate bond and for the common stock fund. Show your calculations on excel for expected returns. Compute the standard deviation for the corporate bond fund and for the common stock fund. Would you invest in the corporate bond fund or the common stock fund? Explain. If choose to invest in the common stock fund and in (c), what do you think about the possibility of losing $999 of every $1,000 invested if there is depression. Explain.Consider a city where everyone commutes to the city center and commuting cost per mile per month is $40. Each household occupies a 1,000-square-foot dwelling and has $7,000 worth of possessions in its dwelling. The probability that any particular household will be burglarized (involving the uninsured loss of all possessions) is 0.10 at the city center and decreases by 0.01 per mile (to 0.09 at one mile, 0.08 at two miles, and so on). The housing price is $1.00 per square foot at the city center. a) Draw the housing-price curve for locations up to five miles from the city center.
- Economics Fenner Smith from Workouts 13.2 is an investor who has preferences for risk o and returnu given by the utility function u = min (µ, 4 –0). He plans to invest $40,000. The market rate of return is 8 percent and the risk-free rate of return is 2 percent. The risk on the market portfolio is 2 percent. a. How much of his $40,000 will a utility maximizing investor hold in the market portfolio? Show this as Bundle A in your diagram. b. The market return rises to 16 percent.How much of his $40,000 will he hold in the market portfolio. Show this as Bundle C in your diagram. c. Calculate the Hicksian ČV for this change. Show this in your diagram as Bundle B.Leo needs one unit of capital from a bank to launch a business. His profits depend on the interest rate of the contract r and the level of effort. Leo can either put high effort in the project, in which case his profits 7 equal y -r with probability 1/2 and 0 with probability 1/2. H | Leo incurs a cost of high effort c=2- Otherwise Leo can put low effort, in which case his profits 7 equals y,-r with probability 1/3 and 0 with probability 2/3. Leo incurs a cost of low effort L c=0: %3D Leo's utility function is 271/2- c where A represents his profits and c the cost of efforts. For a given an interest rate r, the risk-neutral bank receives r if the entrepreneur is successful or -1 if he is not. The bank knows that there are many entrepreneurs like Leo who either make high or low effort. It then proposes two types of loans. The first loan is designed for entrepreneurs who make high effort, with an interest rate r=r,. The second loan is designed for entrepreneurs who make low effort, with…Stewart will have a total wealth of $12,000 this year, if he stays healthy. Suppose Stewart has a 50% chance of staying healthy and a 50% chance of getting sick. If Stewart gets sick, then he will have to pay $8,000 for medical bills, leaving him $4,000 of total wealth. Under these conditions, Stewarts expected wealth (a.k.a. expected value of wealth) is $8,000. Based on the graph shown below, what level of wealth with certainty (i.e., wealth that Stewart is certain to have) would make Stewart equally as happy as he is when facing the 50% chance of being sick?