Question

You have a log utility function ?(?) = ln(?), and your current level of wealth is...

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 the gamble, what will you do this time?

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 Rita has log utility in wealth, ?(?) = ln(?), and has an initial wealth of...
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...
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...
Your utility function is given by U = M0.5. You have a choice: take $50 in...
Your utility function is given by U = M0.5. You have a choice: take $50 in cash or flip a coin. If you flip a coin, the outcomes are as follows: heads, you win $120; tails, you win $X. What does X to be at a minimum for you to accept the gamble? Round to the nearest whole number.
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...
The shape of your utility function implies that you are (arisk-averse or risk-friendly) individual, and, therefore,...
The shape of your utility function implies that you are (arisk-averse or risk-friendly) individual, and, therefore, you ((you would or would not) accept the wager because the difference in utility between B and C is (less than or greater than) the difference between C and A. Which of the following best explain why the pain of losing $1,000 exceeds the pleasure of winning $1,000 for risk-averse people? Check all that apply. The utility function of a risk-averse person exhibits the...
Suppose that your utility function is U = √ I where I is the amount of...
Suppose that your utility function is U = √ I where I is the amount of income you make per month. Suppose that you typically make $8,100 per month, but there is a 5 percent chance that, in the next month, you will get sick and lose $3,200 in income. (a) What is your expected utility if you do not have health insurance to protect against this adverse event? [1 mark] (b) Suppose you can buy insurance that will fully...
Suppose the function u(x) = ln(x) where x is consumption represents your preference over gambles using...
Suppose the function u(x) = ln(x) where x is consumption represents your preference over gambles using an expected utility function. You have a probability ? of getting consumption xB (bad state) and a probability 1-? of getting xG (good state). (a) Find the certainty equivalent xCE of the gamble. Hint: use the fact that ?ln(x0) + ?ln (x1) = ln(x0?x1?) for any positive numbers x0 and x1. (b) Find the risk premium of the gamble. [The following info is for...
Suppose the function u(x) = ln(x) where x is consumption represents your preference over gambles using...
Suppose the function u(x) = ln(x) where x is consumption represents your preference over gambles using an expected utility function. You have a probability ? of getting consumption xB (bad state) and a probability 1-? of getting xG (good state). (a) Find the certainty equivalent xCE of the gamble. Hint: use the fact that ?ln(x0) + ?ln (x1) = ln(x0?x1?) for any positive numbers x0 and x1. (b) Find the risk premium of the gamble. . [The following info is...
You currently have $1,440,000 of wealth, which you keep in the form of two assets: a...
You currently have $1,440,000 of wealth, which you keep in the form of two assets: a bank account worth $1,400,000 and $40,000 in cash in your home safe. However, while you are confident that your home safe is secure, you are concerned that there is a probability ?>0 that your bank will fail (i.e., declare bankruptcy), in which case you would lose all the money in your bank account. (Assume this is the only bank available to you.) The von...
Suppose my utility function for asset position x is given by u(x)=ln x. I now have...
Suppose my utility function for asset position x is given by u(x)=ln x. I now have $10000 and am considering the following two lotteries: L1: With probability 1, I lose $2000. L2: With probability 0.8, I gain $0, and with probability 0.2, I lose $5000. What is expected utility of L1 and L2? Determine which lottery I prefer based on expected utility criterion. Select one: a. Expected utility of L1=9.072, Expected utility of L2=8.987, L1 is preferred. b. Expected utility...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT