Question

) Dan Partridge is a risk averter who tries to maximize the expected value of ?c,...

) Dan Partridge is a risk averter who tries to maximize the
expected value of ?c, where c is his wealth. Dan has $50,000 in safe
assets and he also owns a house that is located in an area where there
are lots of forest fires. If his house burns down, the remains of his house
and the lot it is built on would be worth only $40,000, giving him a total
wealth of $90,000. If his home doesn’t burn, it will be worth $200,000
and his total wealth will be $250,000. The probability that his home will
burn down is 0.01.

(a) Calculate his expected utility if he doesn’t buy fire insurance.

(b) Calculate the certainty equivalent of the lottery he faces if he doesn’t
buy fire insurance.

(c) Suppose that he can buy insurance at a price of $1 per $100 of insurance. For example if he buys $100,000 worth of insurance, he will pay
$1,000 to the company no matter what happens, but if his house burns,
he will also receive $100,000 from the company. If Dan buys $160,000
worth of insurance, he will be fully insured in the sense that no matter
what happens his after-tax wealth will be?

(d) Therefore if he buys full insurance, the certainty equivalent of his
wealth is____ and his expected utility is____.

Please show details thanks!!!

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

a. == 0.01 *90,000+ 0.99 *250,000= 498

b. U= cE = (498)2 = 248004

c.Suppose that he can buy insurance at a price of $1 per $100 of insurance. For example if he buys $100,000 worth of insurance, he will pay $1,000 to the company no matter what happens, but if his house burns, he will also receive $100,000  $100,000 from the company. If Dan buys $160,000 worth of insurance, he will be fully insured in the sense that no matter what happens his after-tax wealth will be :(2500,000 ?160,000)/10= $248,400

d.Therefore if he buys full insurance, the certainty equivalent of his wealth is $248,400 , and his expected utility is 248,400.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Looking for answers with working. 12.12 (0) Dan Partridge is a risk averter who tries to...
Looking for answers with working. 12.12 (0) Dan Partridge is a risk averter who tries to maximize the expected value of ?c, where c is his wealth. Dan has $50,000 in safe assets and he also owns a house that is located in an area where there are lots of forest fires. If his house burns down, the remains of his house and the lot it is built on would be worth only $40,000, giving him a total wealth of...
A small business owner has a log utility function,?(?) = ln(?). She faces a 10% chance...
A small business owner has a log utility function,?(?) = ln(?). She faces a 10% chance of having a fire that will reduce her net worth to $1.00, a 10% chance that a fire will reduce her net worth to $50,000, and an 80% chance that her business will retain its value of $100,000. a. What is the business owner’s expected wealth? b. What is the utility of expected wealth in this scenario? c. What is the expected utility of...
You would like to buy home insurance for a year. The value of your home at...
You would like to buy home insurance for a year. The value of your home at the end of the year will be $100; after a fire the value of the remaining lot will be $20. The probability of fire is Pf= 0.25. You are risk-averse and would like to maximize Expected Utility or E(U). Your Utility function is U = M0.5where M = money. Graph your U function and map the prospects and their corresponding utility levels; additionally, compute...
Tim owns a house worth $400,000. Unfortunately, he faces a 40% risk of a loss of...
Tim owns a house worth $400,000. Unfortunately, he faces a 40% risk of a loss of $300,000. He is an expected utility maximizer with a utility function . He can buy insurance coverage K at a price of g per dollar of coverage. Suppose that g is subsidized by the government and he only pays $0.25 cents for each dollar of coverage (i.e. g= 1/4). What is his optimal coverage. Note:coverage can not exceed losses.
Tim owns a house worth $400,000. Unfortunately, he faces a 40% risk of a loss of...
Tim owns a house worth $400,000. Unfortunately, he faces a 40% risk of a loss of $300,000. He is an expected utility maximizer with a utility function u(c)= ln(c). He can buy insurance coverage K at a price of g per dollar of coverage. Suppose that g is subsidized by the government and he only pays $0.25 cents for each dollar of coverage (i.e. g= 1/4). What is his optimal coverage. Note:coverage can not exceed losses.
PREPARE JOURNAL ENTRIES FOR THE FOLLOWING. 1. January 2: Mr. Burns opened up his new company...
PREPARE JOURNAL ENTRIES FOR THE FOLLOWING. 1. January 2: Mr. Burns opened up his new company and dissolved the old one. The balances of the accounts (with the exception of fixed assets and uncollectible) were transferred over from the old business. Mr. Burns decided that he needed to invest more money into the business in order to get operational. Mr. Burns invested $2,120,000 to create stock. 2. January 3: Mr. Burns bought a cookie making machine for $500,000 from Cookie...
Suppose Hannah is strictly risk averse with a utility function u over monetary amounts (y): u(y)=y​^(1/2)...
Suppose Hannah is strictly risk averse with a utility function u over monetary amounts (y): u(y)=y​^(1/2) Hannah is facing a risky situation: Either nothing happens to her wealth of $576 with probability 3/4 or she losses everything (so ends up with $0) with probability 1/4. Question 1 What is the expected payoff that Hannah is facing? Provide the numerical value. Numeric Answer: Question 2 What is Hannah's expected utility in this gamble? Provide the numerical value. Numeric Answer: Question 3...
Please read the article and answear about questions. Determining the Value of the Business After you...
Please read the article and answear about questions. Determining the Value of the Business After you have completed a thorough and exacting investigation, you need to analyze all the infor- mation you have gathered. This is the time to consult with your business, financial, and legal advis- ers to arrive at an estimate of the value of the business. Outside advisers are impartial and are more likely to see the bad things about the business than are you. You should...
What role could the governance of ethics have played if it had been in existence in...
What role could the governance of ethics have played if it had been in existence in the organization? Assess the leadership of Enron from an ethical perspective. THE FALL OF ENRON: A STAKEHOLDER FAILURE Once upon a time, there was a gleaming headquarters office tower in Houston, with a giant tilted "£"' in front, slowly revolving in the Texas sun. The Enron Corporation, which once ranked among the top Fortune 500 companies, collapsed in 2001 under a mountain of debt...
Discuss ethical issues that can be identified in this case and the mode of managing ethics...
Discuss ethical issues that can be identified in this case and the mode of managing ethics Enron finds itself in this case. How would you describe the ethical culture and levels of trust at Enron? Provide reasons for your assessment. THE FALL OF ENRON: A STAKEHOLDER FAILURE Once upon a time, there was a gleaming headquarters office tower in Houston, with a giant tilted "£"' in front, slowly revolving in the Texas sun. The Enron Corporation, which once ranked among...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT