)Suppose a driver has a 6% of having one accident a year. In case of an accident the value of the car is reduced from $25,000 to $5,000. If driver buys an insurance policy the insurance company would completely cover damage to the car (essentially restoring its value to its initial level). Assume that the driver's utility function is U = VW. a) If price of the insurance policy (premium) is $1500, would this driver be willing to purchase the policy? Explain Show you computations %3D b) What would be the maximum price a driver with 10% chance of accident be willing to pay for the insurance policy?

)Suppose a driver has a 6% of having one accident a year. In case of an accident the value of the car is reduced from $25,000 to $5,000. If driver buys an insurance policy the insurance company would completely cover damage to the car (essentially restoring its value to its initial level). Assume that the driver's utility function is U = VW. a) If price of the insurance policy (premium) is $1500, would this driver be willing to purchase the policy? Explain Show you computations %3D b) What would be the maximum price a driver with 10% chance of accident be willing to pay for the insurance policy?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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5. You are a risk-averse decision maker with a utility function U(1) = VI, where I denotes your income. Your income is $100,000 (thus, I=100). However, there is a 0.2 chance that you will have an accident that results in a loss of $10,000. Now, suppose you have the opportunity to purchase an insurance policy that fully insures you against this loss (i.e., that pays you $10,000 in the event that you incur the loss). What is the highest premium that you would be willing to pay for this insurance policy?
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?
3) Consider the following two gambles: Option A: you win $50 with probability 0.75 and lose $100 with probability 0.25. Option B: You win $100 with probability 0.25 and lose $50 with probability 0.75. Which option is preferred according to expected utility if i) You use an exponential utility function with R=5 ii) You use an exponential utility function with R=10 iii) You use an exponential utility function with R=100 iv) You use an exponential utility function with R=1000 v) You use an exponential utility function with R=10,000
3. Let us consider a utility function: U(x) = (V2x -1. (200sxs800) We have LiL2 where L1=(1, Y) and L2=(0.3, 450, 0.7,648). a. Determine the value of Y. b. Determine RP (Risk Premium) of L2.
Suppose you have an exponential utility function given by U(x) =1- exp(-x/R) where, for you, R = 1000. Further, suppose you have an investment with a 50/50 chance of returning either 0 or 2000 dollars. Note U(0) = 0 and U(2000) = 0.865, so the utility of the lottery is 0.432. What is the certain equivalent of that investment?
Suppose your preferences can characterized by the simple utility function U = √C, where C is consumption. You enjoy rock climbing, where you have a 10% chance of get- ting injured and losing $50,000. Your income (and therefore consumption) in the uninjured state is $90,000. What is the most you are willing to pay for an insurance policy? What is the fee for a fair insurance?
A pirate is about to set sail on a 2-period journey (trip). He has 100 bags of barley (food). He must decide how much to consume in period 1 and how much to consume in period 2: (C1, c2). He gets all the barley in period 1 and none in period 2. Unfortunately, rats will eat 50% of any barley that he saves to consume in period 2. If the pirate's utility function is U(C1, C2) = C1C2, what levels of consumption does he choose in each period? (Hint: The "price" of barley in each period can be assumed to be 1.)
An individual is offered a choice of either $50 or a lottery which may result in $0 or $100, each with equal probability 1/2. If the individual has a utility function u(w) = w, which one would they choose? If the individual has a utility function u(w) =sqr(w)?
Persons A and B are roommates. Person A smokes and Person B does not. The index s measures how smoky the room is. It varies from s=0, where there is no smoke in the room, to s=1, when the room is filled with smoke. Thus, 1-s measures how "clean" the air in the room is. Person A's utility function is UA(XA,S)=XA+In(1+s), where xA is the amount of money Person A owns. Person B's utility function is uB(XB,1s)%3D3XB+2(1-s), where Xg is the amount of money Person B owns. Each person starts with an endowment of 5 units of money. Persch B has the legal right to a smoke-free room and there is a market for "emission right." At the Walrasian equilibrium, what will be the (per unit of smoke index) price p of the emission rights if the price of money is 1? O a. None of the other answers. O b. p=2/3 O c. p=1 O d. p=3/2 О е. р31/6
answer this properly, remember (0.35x50)+(0.65x10)=£24 here
1 pending
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.