Uncertainty The Utility function is U = W1/3Flood occurs with Probabilities=1/25. The Value of a house is $450,000 if no flood. Aftera flood, the value is $50,000. Cost of insurance is 10 cents per dollar.a. Calculate EU b. Calculate EV c. Calculate CE d. Calculate RP e. Calculate the variance and standard deviation f. How much insurance should you buy? Assume your are paying premium in all events.g. What is the expected profit of the insurance company? h. Calculate the coefficient of absolute and relative risk aversion UncertaintyThe Utility function is U = W!/3Flood occurs with Probabilities=1/25. The Value of a house is $450,000 if no flood. Aftera flood, the value is $50,000. Cost of insurance is 10 cents per dollar.a. Calculate EUb. Calculate EVc. Calculate CEd. Calculate RPe. Calculate the variance and standard deviationf. How much insurance should you buy? Assume your are paying premium in all events.g. What is the expected profit of the insurance company?h. Calculate the coefficient of absolute and relative risk aversion (

Expected utility is a weighted average of utilities of each of the possible events.

Answered: Uncertainty The Utility function is U…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Uncertainty
The Utility function is U = W1/3
Flood occurs with Probabilities=1/25. The Value of a house is $450,000 if no flood. After
a flood, the value is $50,000. Cost of insurance is 10 cents per dollar.
a. Calculate EU
b. Calculate EV
c. Calculate CE
d. Calculate RP
e. Calculate the variance and standard deviation
f. How much insurance should you buy? Assume your are paying premium in all events.

g. What is the expected profit of the insurance company?
h. Calculate the coefficient of absolute and relative risk aversion

Uncertainty
The Utility function is U = W!/3
Flood occurs with Probabilities=1/25. The Value of a house is $450,000 if no flood. After
a flood, the value is $50,000. Cost of insurance is 10 cents per dollar.
a. Calculate EU
b. Calculate EV
c. Calculate CE
d. Calculate RP
e. Calculate the variance and standard deviation
f. How much insurance should you buy? Assume your are paying premium in all events.
g. What is the expected profit of the insurance company?
h. Calculate the coefficient of absolute and relative risk aversion (

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