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- Assuming you are risk neutral, frast answer the folowing two questions about your preferences: Scenario A: You are given $5.000 and offered a choice beheeen receiving an extra $2.500 with certainty or fipping a coin and getting $5.000 t heads or S0 if tain. Which option do you prefer? A The certain $2.500 is more valuable than the uncertain $5.000, I would choose the $2.500 Both options have identical payofs, so l am indiferent between the two options. The possibility of the 5.000 payoff is more valuable to me than the oertain $2.500, I chocse to fio a coin Scenario B. You are given $10.000 f you wil make the following choice: retum $2.500 or fip a coin and retum $5.000 heads and so tai. Which opton do you prefer? A The certain los of S$2.500 is more paintu than the possible loss of $5,000, I choose to fip a coin. OR The ponsibility of the los of $5.000 is more paintul to me than the certain los of $2.500, I would choose the $2.500 certan loss re Both options have identical payoffs, so…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.is it true or false or uncertain, explain ?
- BN10.2 Case: Jennifer is willing to Pay $300 to Insure against the Theft of a $8,000 Necklace. The Probability of Theft is 4%. Question: What is Jennifer's Risk Tolerance?Your friend is contemplating buying a local restaurant. He has assessed the lifetime profits, including resale, to be $11 million with 20% chance, $6 million with 60% chance or $3 million with 20% chance. Knowing the most your friend would pay for the restaurant is $6.4 million, what can you infer about the situation? O A. The expected payoff of the restaurant is $6.333 million, the risk-discount being offered by your friend is $77.000 and your friend is risk averse with respect to this purchase. O B. The expected payoff of the restaurant is $6.4 million, the risk-premium being required by your friend $0 and your friend is risk neutral with respect to this purchase. o C. The expected payoff of the restaurant is $6.4 million, the risk-premium being required by your friend $200,000 and your friend is risk seeking with respect to this purchase. O D. The expected payoff of the restaurant is $6.333 million, the risk-premium being required by your friend is $333,000 and your friend is risk…27 of 38 Larissa experiences a diminishing marginal utility of income. Because of this we know that Larissa's attitude toward risk is that of O A. risk neutral. O B. risk loving. O C. risk averse. O D. risk caring. Unsure
- "Your company is comparing three projects that have risks associated with them. Based on the data in the foliowing data in the table, which should be chosen? Project A Project B Project C Probability 0.3 EUAW Probability 0.3 0.2 EUAW EUAW -$2,400 $2,000 $3,500 $3,000 -$2,300 $3,800 Probability 0.1 0.4 -$5,500 $7,200 $1,900 0.45 0.25 0.5 0.5Becky is deciding whether to purchase an insurance for her home againtst burglary. the payoff for her is shown as follow: Net worth of her Net worth of her home: $ 20000 burglary(10%) Net worth of her Net worth of her home: $50000 burglary (90%) The insueance would cover all the loss from burlary and the insurance fee is $8000. Her utility funtion is given as u=w ^0.3 Should Beck purchase the insurance Explain.A wheel of fortune in a gambling casino has 54 different slots in which the wheel pointer can stop. Four of the 54 slots contain the number 9. For a 1 dollar bet on hitting a 9, if he or she succeeds, the gambler wins 10 dollars plus the return of the 1 dollar bet. What is the expected value of this gambling game? What is the meaning of the expected value result?
- 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.Moral Hasard and Insurance The utility is U = W1/2 − 350S + 95S1/2 ; where W is wealth and S is care taken to avoid accidents. Probability of accident is 0.70 − S1/2 Wealth is ✩850,000 without accident and ✩300,000 with accident. Calculate S, EU and CE without insurance. Calculate S and EU with full insuranceWhat term do economists use to describe the tendency for people to prefer certain outcomes over risky situations? a. The precautionary principle b. Risk differentiationc. Risk uncertainty d. Risk aversion e. Risk management