Question

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 wealth in this scenario?

d. Is this person risk averse? Explain.

e. What is the certainty equivalent of wealth in this scenario and what does this mean?

f. What are the risk premium and cost associated with this gamble?

g. What is the maximum amount she would pay for insurance that ensures her wealth is not affected?

Answer #1

Suppose Rita has log utility in wealth, ?(?) = ln(?), and has an
initial wealth of $40,000. There is a 25% chance that she will be
healthy this year and her wealth won’t be affected by illness.
However, there is a 50% chance that she will have a minor illness
at some point and a 25% chance that she will experience a major
illness. In the case of a minor illness, she will lose $5,000 of
her wealth, but a...

You have a log utility function ?(?) = ln(?), and your current
level of wealth is $5,000.
a. Suppose you face a 50/50 chance of winning or losing $1,000.
If you can buy insurance that completely removes the risk for a fee
of $125, will you buy it, or take the gamble?
b. Suppose you accept the gamble and lose, so you now have
$4,000. If you are given the same choice to buy the insurance for
$125 or take...

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 the function u(x) = ln(x) represents your taste over
gambles using an expected utility function. Consider a gamble that
will result in a lifetime consumption of x0 with probability p, and
x1 with probability 1 – p, where x1 > x0.
(a) Are you risk averse? Explain.
(b) Write down the expected utility function.
(c) Derive your certainty equivalent of the gamble. Interpret
its meaning. Use the fact that αln(x0) + βln (x1) = ln(x0 α x1 β
)....

An entrepreneur has a venture that will make either $196 million
or $0. The chance that this venture will make $196 million depends
on the effort expended by the entrepreneur: If she tries hard, the
chance of the $196 million outcome is 0.2. If she does not try
hard, the chance of this outcome is 0.04. The entrepreneur is risk
averse with utility function: u(x)=√x-disutility of effort:
where the disutility of effort is 0 if the entrepreneur does not
try...

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...

"Risk' can be best defined as on the of the
followings:
a. Variability of returns and probability of financial loss
b. Chance of financial loss
c. Variability of returns
d. Correlation of relationship among two variables
Which of the following statement is NOT TRUE when we argue that
the idea of riskless arbitrage is to accumulate the portfolio with
following conditions :
a. Requires no net wealth invested initially
b. Invest in the long-term securities only where risk will be...

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
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Outside advisers are impartial and are more likely to see the bad
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What role could the governance of ethics have played
if it had been in existence in the organization? Assess the
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THE FALL OF ENRON: A STAKEHOLDER FAILURE
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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...

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