Suppose that 20 risk neutral competitors participate in a rent seeking game with a fixed prizeof $500. Each player may invest as much money as he wishes in the political contest. Theprobability of winning is directly proportional to the candidate's share of the total rent-seekinginvestment.1. What is the expected net benefit of a player if all other players invest $20 each? Writethe net benefit as a function of the player's investment.2. Solve the maximization problem to arrive at the profit-maximizing investment. Round tothe nearest cent.

Investment: It refers to the amount of money that is being invested by the people and the…

Answered: Suppose that 20 risk neutral…

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. Understanding risk aversion Suppose your friend Juanita offers you the following bet: She will flip a coin and pay you $1,000 if it lands heads up and collect $1,000 from you if it lands tails up. Currently, your level of wealth is $3,000. The graph shows your utility function from wealth. Use the graph to answer the following questions. UTILITY (Units of utility) 100 90 80 70 60 50 40 30 20 10 0 0 A+ C B WEALTH (Thousands of dollars)
Consider a health insurance market. The market has many insurers so that each insurance company offers insurance at the fair insurance premium. Each consumer has utility function, and has an initial wealth of $200. Consumers have access to a (magical) gym that reduces their probability of needing to go to the doctor from 90% to 10%. A gym membership costs $6. A trip to the doctor costs $120. Suppose insurance companies charge the fair insurance premium which assumes all consumers go to the gym. This fair insurance premium is $? and the insurance company makes a profit of $? per consumer. Suppose insurance companies continue to charge the fair insurance premium that assumes all consumers go to the gym, but now charges a copay of $15 for a doctor's visit. The insurance company now makes a profit of $ per consumer. By implementing a copay, the insurance company the problem.
Consider the following payoff matrix B R U 7, 7 4,17 A 17,4 6,6 Players A and B repeatedly play this game with an infinite horizon. Future payoffs are discounted with 1/(1+r), where r is the long-term interest rate. Determine the interval of r for which the Carrot-and-Stick strategy does form a Nash-equilibrium when the opponent can discover any deviation immediately. Remember the following relation TA+Lt-1 (14+t) TB TB = TA + O r>0.1 O r0.2 Or-1 O r1
Consider the following claim: “If a decision maker prefers one given lottery that yields $x with probability 1 over another given lottery whose expected return is $x, then we can fully characterize the agent's risk attitude. That is, this information comparing two given lotteries is enough to determine if the decision maker is risk averse, risk loving or risk neutral.” If this claim is TRUE, then provide a proof. If it is FALSE, then prove your argument by providing an explanation.
1. ) 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 b) What would be the maximum price a driver with 10% chance of accident be willing to pay for the insurance policy?
3. A risk-neutral principal hires an agent to work on a project at wage w. The agent's utility function is: v(w)-g(e), where v(w)= Jw and g(e)=e/2 The agent can choose one of two possible effort levels, e¡ = 4 or e, = 6 . If the agent chooses effort level e, = 4 the project yields 100 with probability 1/4 and 0 with probability 3/4. If he chooses e, = 6 the project yields 100 with probability ½ and 0 with probability ½. The reservation utility of the agent is 0. (a) Suppose the effort level chosen by the agent is observable by the principal. Find the contract chosen by the principal. Show graphically in terms of contingent utilities v(w,00) and v(w.)

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