2 Skipper has riskless assets of $30,000, a carworth $20,000 and a risk-averse utilityfunction of His car is subject to the followingloss distribution:LiP(L;)20,0000.015,0000.051,0000.100.84a. Find the expected loss, theexpected value of the car, Skipper'sexpected utility without insurance,the certainty equivalent and the riskpremium of the car. What is Skipper'smaximum premium for full coverage.b. Would Skipper buy full insurancefor his car if the premium is $585?Please explain your answer.

Answer a) Li P(Li) Li x P(Li) 20000 0.01 200 5000 0.05 250 1000 0.10 100 0 0.84 0…

Answered: Skipper has riskless assets of $30,000,…

Skipper has riskless assets of $30,000, a car worth $20,000 and a risk-averse utility function of His car is subject to the following loss distribution: Li P(L;) 20,000 0.01

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter16: Labor Markets

Section: Chapter Questions

Problem 16.9P

See similar textbooks

Similar questions

You live in an area that has a possibility of incurring a massive earthquake, so you are considering buyingearthquake insurance on your home at an annual cost of $180. The probability of an earthquake damagingyour home during one year is 0.001. If this happens, you estimate that the cost of the damage (fully coveredby earthquake insurance) will be $160,000. Your total assets (including your home) are worth $250,000.
Please all solve the issue
Typed Plzzzz And Asap Thanks
Exercise 9.2 (start-up and venture capitalist exit strategy). There are three periods, t = 0, 1, 2. The rate of interest in the economy is equal to 0, and ev- eryone is risk neutral. A start-up entrepreneur with initial cash A and protected by limited liability wants to invest in a ﬁxed-size project. The cost of invest- ment, incurred at date 0, is I > A. The project yields, at date 2, R > 0 with probability p and 0 with prob- ability 1 − p. The probability of success is p = pH if the entrepreneur works and p = pL = pH − ∆p (∆p > 0) if the entrepreneur shirks. The entrepre- neur’s eﬀort decision is made at date 0. Left unmon- itored, the entrepreneur obtains private beneﬁt B if she shirks and 0 otherwise. If monitored (at date 0), the private beneﬁt from shirking is reduced to b B. There is a competitive industry of venture capi- talists (monitors). A venture capitalist (general part- ner) has no fund to…
Utility Theory You live in an area that has a possibility of incurring a massive earthquake, so you are considering buyingearthquake insurance on your home at an annual cost of $180. The probability of an earthquake damagingyour home during one year is 0.001. If this happens, you estimate that the cost of the damage (fully coveredby earthquake insurance) will be $160,000. Your total assets (including your home) are worth $250,000. A. Apply Bayes’ decision rule to determine which alternative (take the insurance or not) maximizes yourexpected assets after one year.
ease use utility of wealth function in the booK, 8-1 (see below). Certainty Utility B D 200 198 194 D' Total utility 170 of wealth C' Expected Utility A 140 10,000 15,000 19,000 20,000 Wealth FIGURE 8-1 Total Utility of Wealth and the Impact of Insurance Please explain the difference between the certainty utility line and the expected utility line b. Calculate your E(U), given an 80% change of being healthy and 20% of being sick, knowing that your income falls to $10,000 and your utility is 140 if you get sick. Calculate your E(W), given an 80% change of being healthy and 20% of being sick. d. Given that your Certainty Utility Function is U = 200Y-0.00154 and Y is your income, what is your Certainty Utility with insurance (if you are risk averse) What insurance premium will you pay to guarantee a utility of 197? Please provide a calculation.
5
Eunice, the industry analyst of H&M, wants to determine the propensity of Major Clothingcompanies toward risk. She was able to determine the utility distribution of H&M, Uniqloand Dickies. For H&M, If the expected payoff of a venture is a loss of 125,000, the utilityvalue is 0.00, if a loss of 75,000, the utility value is .2, if breakeven, the utility value is .5,if gain of 75,000 .8 and if gain of 125,000 utility value is 1. For Uniqlo, if loss of 125,000utility value is 0, if loss of 75,000 utility value is .1, breakeven is .4, if a gain of 75,000,utility value is .7 and if gain of 125,000 utility value is 1. For Dickies, if loss of 125,000,utility value is 0, if loss of 75,000, utility value is .3 breakeven is .6, if gain of 75,000, utilityvalue is .9 and gain of 125,000, utility value is 1. What is the propensity to risk of the threeinternet companies? Explain your graph.
1. A customer has utility function u(x) = log(x + 1000). The customer’scurrent wealth is $28,000. The customer’s car has a value of $14,700. Theprobability of the car being stolen is 0.016. How much would the customerbe willing to pay for insurance against the car being stolen?
please explain clearly
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…
16. The market consists of only two assets, A and B, with normally distributed re- turns. Asset A's returns have a mean of 18% and a standard deviation of 14% and Asset B's returns have a mean of 15% and a standard deviation of 18%. In such a scenario a risk-averse investor would always want to invest all of her money in Asset A. 17. A call option offers the purchaser limited downside loss as given by the option premium paid, combined with limited upside potential. 18. The return earned on a risk free portfolio must be equal to the risk free interest rate. 19. CAPM assumes that all investors' optimal portfolio has a fraction invested in the risk-free asset and the remaining in the minimum variance portfolio. 20. For any frontier portfolio p, except the minimum variance portfolio, there exists a unique frontier portfolio with which p has zero covariance. 21. The market portfolio of all available assets is the supply of risky assets. 22. An arbitrage opportunity is an…