Question 3: Jane has utility function over her net income U(Y)-Y2 a. What are Jane's preferences towards risk? Is she risk averse, risk neutral or risk loving? [Briefly explain your answer] b. Jane drives to work every day and she spends a lot of money on parking meters. She is considering of cheating and not paying for the parking. However, she knows that there is a 1/4 probability of being caught on a given day if she cheats, and that the cost of the ticket is $36. Her daily income is $100. What is the maximum amount of she will be willing to pay for one day parking? c. Paul also faces the same dilemma every single day. However, he has a utility function U(Y)=Y. His daily income is also $100. What is Paul's preference towards risk? Is he risk averse, risk neutral or risk loving? d. If the price of one day parking is $9.25, will Paul cheat or pay the parking meter? Will Jane cheat or pay the parking meter?

Question 3: Jane has utility function over her net income U(Y)-Y2 a. What are Jane's preferences towards risk? Is she risk averse, risk neutral or risk loving? [Briefly explain your answer] b. Jane drives to work every day and she spends a lot of money on parking meters. She is considering of cheating and not paying for the parking. However, she knows that there is a 1/4 probability of being caught on a given day if she cheats, and that the cost of the ticket is $36. Her daily income is $100. What is the maximum amount of she will be willing to pay for one day parking? c. Paul also faces the same dilemma every single day. However, he has a utility function U(Y)=Y. His daily income is also $100. What is Paul's preference towards risk? Is he risk averse, risk neutral or risk loving? d. If the price of one day parking is $9.25, will Paul cheat or pay the parking meter? Will Jane cheat or pay the parking meter?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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4) Luke is planning an around-the-world trip on which he plans to spend $10,000. The utility from the trip is a function of how much she spends on it (Y ), given by U(Y) = InY a). If there is a 25 percent probability that Luke will lose $1000 of his cash on the trip, what is the trip's expected utility. b). Suppose that Luke can buy insurance to fully against losing the $1,000 with a actuarially fair insurance. What is his expected utility if he purchase this insurance. Will he purchase the insurance? c). Now suppose utility function is U(Y) = Y/1000 What is his expected utility if he purchase the insurance in b). Will he purchase the insurance?
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.)
4. Kate has von Neumann-Morgenstern utility function U(x1,x2) = m7. She currently has $2025. a. Would she be willing to undertake a gamble that involves a gain $2875 with probability + and a loss of $1125 with probability ? Show your work and explain your answer. b. Would she be willing to undertake a gamble that involves a gain $2599 with probability and a loss of $800 with probability ? Show your work and explain your answer.
Joey has utility function 1+√x where x is the amount of money he has. He is... A) Cannot tell from the information provided B) Risk averse C) Risk Netutral D) Risk Loving
1. Mel is thinking of going on a cruise. Mel values a cruise in nice weather at $2,000 and values a cruise in bad weather at $50. The probability of nice weather is 60 percent and the probability of bad weather is 40 percent. Trip insurance is sometimes available. If purchased, it allows travelers to delay the cruise until the weather is nice. Suppose that the price of the cruise is $1,200. If Mel is risk-neutral, then Mel should: not buy trip insurance. only buy trip insurance if it costs less than $780. only buy trip insurance if it costs less than $20. only buy trip insurance if it costs less than $50. 2. Several web sites, like Pricewatch.com, allow consumers to input the name of a product, and the site then returns a list of suppliers with their respective prices for the product. This: increases the benefit of search.. increases the free-rider problem. reduces the benefit of search. reduces the cost of search.
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.
Aa4
(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.
2. Christiaan can go hiking, or he can stay at home. Hiking would be fun if nothing bad happens, but there is a risk if he goes hiking that he will meet a bear (not fun) or get bitten by a snake (very not fun). Christiaan decides that if there is a 5% chance of meeting a bear and a 1% chance of getting bitten by a snake, he would prefer to go hiking rather than stay at home. However, if the chance of meeting a bear is 10% and the chance of a snake bite is 5%, he definitely would rather stay at home. then (a) Consider the utility function: U (stay home) = 25, U (hike no event) = 100, U (hike & snake) -1000, U (hike & bear) = -200. Does this utility function represent Christiaan's pref- erences? Explain. (b) Suppose that the utility function in (a) does represent Christiaan's preferences. Would Christiaan prefer to hike or stay home if the probability of meeting a bear is 6% and the probability of being bitten by a snake is 4%? Show your work.
Exercise 4: Insurance Fiona has von Neumann-Morgenstern utility function u(x) = VT and initial wealth 640, 000. She faces a 25% chance of losing L = 280, 000. 1. Is Fiona risk averse? 2. What is Fiona's utility if no loss occurs, what is her utility if the loss occurs? What is Fiona's expected utility? 3. What is the cost of fair insurance against the possible loss? Suppose Fiona is able to choose insurance with any coverage z E [0, 1] (i.e. 0 0 C(z) = if z = 0 4. Suppose co = 0 and c1 = 70,000. Is insurance at coverage level z > 0 fair insurance? What coverage level z* would Fiona choose? Explain. 5. Suppose co = 100 and c1 = 70,000. Is insurance at coverage level z > 0 fair insurance? What coverage level z** would Fiona choose? Explain. (Note that co = 100 is an "avoidable fixed cost" which is only paid if she chooses strictly positive insurance coverage. However, the "marginal cost" of additional insurance, c1 = 70,000, is the same as in the previous part.) 6. Suppose co = 100 and…