Question

Consider an individual whose utility function over wealth is U(W), where U is increasing smoothly in...

Consider an individual whose utility function over wealth is U(W), where U is increasing smoothly in W (U’ > 0) and convex (U’’ > 0).

a. Draw a utility function in U-W space that fits this description.

b. Explain the connection between U’’ and risk aversion

c. True or false: this individual prefers no insurance to an actuarially fair, full contract. Briefly explain your answer

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

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
Suppose that Elizabeth has a utility function U= (or U=W^(1/3) ) where W is her wealth...
Suppose that Elizabeth has a utility function U= (or U=W^(1/3) ) where W is her wealth and U is the utility that she gains from wealth. Her initial wealth is $1000 and she faces a 25% probability of illness. If the illness happens, it would cost her $875 to cure it. What is Elizabeth’s marginal utility when she is well? And when she is sick? Is she risk-averse or risk-loving? What is her expected wealth with no insurance? What is...
Suppose you are endowed with with a utility function over wealth given by: u(w) = 7w...
Suppose you are endowed with with a utility function over wealth given by: u(w) = 7w + 100. Further, suppose you are offered a gamble that pays $10 with probability 30% and $100 with probability 70%. (A) What is the expected value of this gamble? (B) Would you rather have the gamble, or a guaranteed $70? (C) Now suppose your utility function is u(w) = 100w − 18. How does your answer in (B) change? (D) Suppose the utility function...
Risk Aversion Suppose an individual has utility of wealth given by ?(?) = √?. a. Does...
Risk Aversion Suppose an individual has utility of wealth given by ?(?) = √?. a. Does this utility function exhibit positive marginal utility of wealth, i.e. is ? ′ (?) > 0? What does this mean? b. Does this utility function exhibit increasing or decreasing marginal utility of wealth, i.e. is ? ′′(?) > 0, or ? ′′(?) < 0? What does this mean? c. Is this utility function consistent with risk aversion? Explain. d. Define what a risk premium...
Bernoulli’s log utility function for wealth reflects decreasing _____ with increasing wealth Assets Risk Marginal utility...
Bernoulli’s log utility function for wealth reflects decreasing _____ with increasing wealth Assets Risk Marginal utility Cost None of the above Linear utility functions model: Risk-neutral attitudes Risk-seeking attitudes Risk-averse attitude None of the above Concave utility functions model: Risk-neutral attitudes Risk-seeking attitudes Risk-averse attitudes All of the above. John Doe is a rationale person whose satisfaction or preference for various amounts of money can be expressed as a function U(x) = (x/100)^2, where x is in $. How much...
Consider Brandy who has an initial wealth of $200,000. Over the next year, Brandy faces a...
Consider Brandy who has an initial wealth of $200,000. Over the next year, Brandy faces a 10% risk of getting a grave illness that will cost $100,000 to treat. a. What is the actuarially fair price of insurance? Explain. b. What is her expected utility without insurance if U(Wealth=100,000)=200 and U(Wealth=200,000)=340? c. Brandy is willing to pay up to $15,000 for insurance that will cover the entire cost of care should she become ill. What does this tell you about...
Consider a consumer whose preferences over the goods are represented by the utility function U(x,y) =...
Consider a consumer whose preferences over the goods are represented by the utility function U(x,y) = xy^2. Recall that for this function the marginal utilities are given by MUx(x, y) = y^2 and MUy(x, y) = 2xy. (a) What are the formulas for the indifference curves corresponding to utility levels of u ̄ = 1, u ̄ = 4, and u ̄ = 9? Draw these three indifference curves in one graph. (b) What is the marginal rate of substitution...
TRUR/FALSE EXPLANATION 1.11 When an individual has utility function U(W) =W, the expected value and expected...
TRUR/FALSE EXPLANATION 1.11 When an individual has utility function U(W) =W, the expected value and expected utility of a risky event are the same. 1.12 Risk averse individuals never prefer a lottery over a sure bet. 1.13 In a lemons market with adverse selection, the equilibrium always involves only the lemons being bought and sold. 1.14 If a firm achieves efficiency in production when hiring they also necessarily achieve efficiency in risk bearing. 1.15 Only the total compensation paid to...
Consider a worker with a utiltiy function: U=W-R2, where W is the wage, and R is...
Consider a worker with a utiltiy function: U=W-R2, where W is the wage, and R is the risk of fatality per 100,000 workers per year. a) On a graph, draw the two indifference curves that represent this worker's preference for wage versus risk at utility levels: U1=10 and U2=20. b) Which of the following two offers would this worker prefer: (W=$20, R=1) OR (W=$25, R=3)? c) Assume this worker is currently employed at a job with W=$30 and R=2. By...
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...
2. An individual utility function is given by U(c,h) = c·h, where c represents consumption during...
2. An individual utility function is given by U(c,h) = c·h, where c represents consumption during a typical day and h hours of leisure enjoyed during that day. Let l be the hours of work during a day, then l + h = 24. The real hourly market wage rate the individual can earn is w = $20. This individual receives daily government transfer benefits equal to n = $100. For the graphical analysis of this individual’s utility maximization problem,...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT