Suppose your current wealth, M, is 120 and yourutility function is U = M2. You have a lottery ticketthat pays $10 with a probability of 0.1 and $0 with aprobability of 0.9. What is the minimum amount forwhich you would be willing to sell this ticket?Instructions: Round your answer to 2 decimal places.S

To determine the minimum amount for which you would be willing to sell the lottery ticket, we need…

Answered: Suppose your current wealth, M, is 120…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Anna is risk averse and has a utility function of the form u(w) pocket she has €9 and a lottery ticket worth €40 with a probability of 50% and nothing otherwise. She can sell this lottery ticket to Ben who is risk neutral and has €30 in his pocket. Find the range of prices that would make such a transaction possible
Amy has a utility function U(Y) = Y5 where Y is income. Amy faces an opportunity to invest her savings of $100,000. There is a 85% chance for her to ean $1,600, and a 15% chance for her to earn $6,400. What is her expected utility from this investment opportunity? Select one: OA. 49.19 B. 44 Oc. 48.17 D. 46
Kindly solve 3rd question only
# 4 Consider an individual with a utility function of the form u(w) = √w. The individual has an initial wealth of $4. He has two investments options available to him. He can eitffer keep his wealth in an interest-free account or he can take part in a particularly generous lottery that provides $12 with probability of 1/2 and $0 with probability 1/2. Assume that this person does not have to incur a cost if he decides to take part in the lottery. (a) Will this individual participate in the lottery? (b) Calculate this individual's certainty equivalent associated with the lottery. What is his risk premium?
2
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?
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.
Veer
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)?
1. Johnathan's utility for money is given by the exponential function: U(X)-4-4*100). a. Based on his utility function, what is his risk-odds for the S+/-1 deal, r($1)? b. Is Johnathan a deltaperson? Explain. c. Is he risk-neutral? Explain. d. What is his risk-odds for the $+/-100 deal, r($100)? e. What is his risk-aversion coefficient? [(-x/10
Mr Usu has an expected utility function with u(x) = x0.5. He is analyzing an investment opportunity that promises to pay out $1,160 with prob. 0.6 and $2,800 with prob. 0.4. What is the expected utility of this opportunity?
3. A decision maker is faced with a choice between a lottery with a 30% chance of a payoff of $30 and a 70% chance of a payoff of $80, and a guaranteed payoff of $65. a. If the decision makers utility function is U = 1/2 what is the risk premium associated with this choice? b. If the decision makers utility function is U = | + 500, what is the risk premium associated with this choice? Please make sure you answers/hand writing are clear and easy to read %3D

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