Question
In: Economics
A decision maker (DM) has a house worth $80,000 and $10,000 cash. These are all of...
A decision maker (DM) has a house worth $80,000 and $10,000
cash. These are all of his assets. There is a risk of a fire in
which case he will lose the house altogether. DM can insure against
the fire completely for a premium of $9,000. In other words, if he
buys this insurance his assets will be worth $81,000, whether or
not there is an accident. Probability of the fire is 0.1. (a) (10
points) If the decision maker is risk neutral, i.e., DM’s utility
function is u(x) = x, would he buy this insurance policy? (b) (10
points) If the decision maker is an expected utility maximizer and
has utility function px, where x is the value of his total assets,
would he buy this insurance policy?
(c) (10 points) Suppose he can buy partial insurance that covers
80% of the losses for a premium of $7,000. Would he buy this
insurance? Which one does he prefer, 100% insurance for $9,000 or
80% insurance for $7,000? (Assume u(x)=px)
Solutions
Rahul Sunny answered 2 years agoRelated Solutions
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A decision-maker is a father who has two sons.They are going to
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least favorite are as following: • Father: ω2, ω5, ω3, ω4, ω1; •
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decision-maker cares and only cares the feeling of his sons, and
thus he...
A decision maker has a utility function for monetary gains x given by u(x)= (x-10,000)^1/2....
A decision maker has a utility function for monetary gains x
given by
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i. Show that the person is indifferent between the status quo
and
L: With probability 2/3, he or she gains $700,000
L: With probability 1/3, he or she loses $100,000
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exercise 1. you have n Elements in [0,1] uniformly distributed and independent.The decision maker sees all...
exercise 1. you have n Elements in [0,1] uniformly distributed
and independent.The decision maker sees all n Elements
simultaneously and wants to take the best of of them. Prove that
for the case n=3 the exepected value Emin(3)=1/4,Emax(3)=3/4 and
Emed(3)=2/4, where Emin=E(min{x1,x2,x3}) and
Emax=E(max{x1,x2,x3})
Please Provide an answer ASAP,
Thanks
The IRR is the interest rate that makes the Present Worth "PW" of all the cash...
The IRR is the interest rate that makes the Present Worth "PW"
of all the cash flows (inflows and outflows) equal to zero
True
False
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ii) If your required rate of return is 32 per cent calculate the
NPV and determine whether you should accept the project?
iii) If you have arbitrarily set the required return at 32 per
cent but the market rate of return for a project with this level of
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Assume that your grandmother wants to give you generous
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years. The first $1400 would be received 1 year
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