Persons A and B are roommates. Person A smokes and Person B does not. The index smeasures how smoky the room is. It varies from s=0, when there is no smoke in the room, to s=1,when the room is filled with smoke. Thus, 1-s measures how "clean" the air in the room is.Person A's utility function is uA(XA,S)=XA.s, where XA is the amount of money Person A owns.Person B's utility function is Ug(XB,1s)=XB. (1-s)3, where xg is the amount of money Person Bowns. Each person starts with an endowment of 5 units of money. Person A has the legal rightto a fill up the room with smoke and there exists a market for smoke "abatements". At theWalrasian equilibrium, how much money will person B be left with?O a. XB=1.25O b. XB=2.25O c. XB=0.25O d. Xg=0.25O e. None of the other answers.

Answered: B đoes not. The index s measures how…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Persons A and B are roommates. Person A smokes and Person B does not. The index s measures how smoky the room is. It varies from s=0, when there is no smoke in the room, to s=1, when the room is filled with smoke. Thus, 1-s measures how "clean" the air in the room is. Person A's utility function is ua(XA,s)=Xa.S, where xA is the amount of money Person A owns. Person B's utility function is ug(xg, 1s)=Xg .(1-s)³, where xg is the amount of money Person B owns. Each person starts with an endowment of 5 units of money. Person A has the legal right to a fill up the room with smoke and there exists a market for smoke "abatements". At the Walrasian equilibrium, how much money will person B be left with? а. Хв31.25 ОБ. Хв32.25 O c. XB=0.25 O d. Xg=0.25 е. None of the other answers.
Persons A and B are roommates. Person A smokes and Person B does not. The index s measures how smoky the room is. It varies from s=0, where there is no smoke in the room, to s=1, when the room is filled with smoke. Thus, 1-s measures how "clean" the air in the room is. Person A's utility function is UA(XA,S)=XA+In(1+s), where xA is the amount of money Person A owns. Person B's utility function is uB(XB,1s)%3D3XB+2(1-s), where Xg is the amount of money Person B owns. Each person starts with an endowment of 5 units of money. Persch B has the legal right to a smoke-free room and there is a market for "emission right." At the Walrasian equilibrium, what will be the (per unit of smoke index) price p of the emission rights if the price of money is 1? O a. None of the other answers. O b. p=2/3 O c. p=1 O d. p=3/2 О е. р31/6
QUESTION 5 A consumer has utility u (I) = √I and income $1,600. The cost of going to the doctor is $1,150, and the cost of going to the gym is $150. If the consumer goes to the gym, the probability of getting sick is 20%; if she does not go to the gym, the probability of getting sick is 80%. When sick, the consumer must go to the doctor. An insurance company is offering a health insurance plan with an insurance premium of $230 and a co-pay of $110 (that is, the consumer must pay the $110 if she goes to the doctor). a) The consumer's expected utility from purchasing this insurance and going to the gym is b) The consumer's expected utility from purchasing this insurance and not going to the gym is c) In this market, the $110 copay ✓ QUESTION 6 A salesperson is trying to sell ca Given her effort e, with probabili The dealership pays her a bonu a) Given the bonus b, the salesp b) Suppose the dealership pays *Select Answer* 34.6061 35.7999 37.0135 43.0338 42.4303 46.2601 fixes the adverse…
Chris Traeger is trying to decide whether or not to purchase health insurance. Chris knows that if he is healthy, his wealth will be $2,000 this year. However, if he gets sick his wealth will only be $500. Chris knows the probability of getting sick is 40%. His utility function is written below. U = (2) What is utility if the individual purchases insurance at the actuarially fair price? 25.29 utils 26.46 utils 31.62 utils 18.97 utils
There are two shows on Netflix that Jeff can watch, Show 1 and Show 2. x₁ measures the number of episodes watched of Show 1 and x₂ measures the number of episodes watched of Show 2. Jeff's preferences can be represented by u(x₁, x₂) = x² + ax². Jeff has 11 hours available for watching Netflix today. Each episode of Show 1 lasts 30 minutes, while each episode of Show 2 lasts one hour. For all question parts, round to three decimal places if necessary. For parts (a) - (f), let a = 1. Draw Jeff's indifference curves for the utility levels u = 4, 9, 16. Draw a straight line between the bundles (x₁, x₂) = (4, 0) and (x₁, x2) = (0, 4). Now, use your picture to determine whether the following two statements are true or false. Answer "1" for true. Answer "0" for false. a) Statement 1: Jeff's preferences are strongly monotone. 1 b) Statement 2: Jeff's preferences are strictly convex. 0 c) Find the bundle at which one of Jeff's indifference curves is tangent to the budget line. (x₁, x^2) = ( d)…
There are two shows on Netflix that Jeff can watch, Show 1 and Show 2. x₁ measures the number of episodes watched of Show 1 and x2 measures the number of episodes watched of Show 2. Jeff's preferences can be represented by u(x₁, x₂) = x² + ax². Jeff has 5 hours available for watching Netflix today. Each episode of Show 1 lasts 30 minutes, while each episode of Show 2 lasts one hour. For all question parts, round to three decimal places if necessary.
John is a farmer with $225 of wealth. He can either plant corn or beans. If he plants corn, John earns an income of $675 if the weather is GOOD and $0 if the weather is BAD. If he plants beans, John earns an income of $451 under both GOOD and BAD weather. The probability of GOOD weather is 0.7. The probability of BAD weather is 0.3. John's utility function is u(C) = 5VC , where C is the value of consumption. Use this information to fill out the table below. (Don't forget to include the value of wealth when you compute consumption!). The PDF will round all typed numbers to two decimals; However, you should use all decimals when computing your answers. %3D Plant Corn Plant Beans Expected value of consumption Expected value of utility Certainty Equivalent Risk Premium 9. What type of risk preferences does John have? Mae owns an insurance company in a nearby town and has decided to offer conventional crop insurance to corn farmers in the area. Assume that Mae has perfect information and…
John is a farmer with $225 of wealth. He can either plant corn or beans. If he plants corn, John earns an income of $675 if the weather is GOOD and $0 if the weather is BAD. If he plants beans, John earns an income of $451 under both GOOD and BAD weather. The probability of GOOD weather is 0.7. The probability of BAD weather is 0.3. John’s utility function is U(c) = 5√c , where c is the value of consumption. Mae owns an insurance company in a nearby town and has decided to offer conventional crop insurance to corn farmers in the area. Assume that Mae has perfect information and can write and enforce an insurance contract that requires the farmer to plant corn. Here’s how the insurance contract works. At the beginning of the year, the corn farmer pays an insurance premium of $202.5. If the weather is GOOD, Mae makes no payment to the farmer. If the weather is BAD, Mae makes an indemnity payment of $675 to the farmer. a. If a farmer buys this insurance contract,what is Mae’s expected…
Consider a household that possesses $200,000 worth of valuables such as jewelry. This household faces a 0.02 probability of a burglary, where she would lose jewelry worth $70,000. Suppose it can buy an insurance policy for $15,000 that would fully reimburse the $70,000. The household's utility function is U(X) = 4X⁰.5 Should the household buy this insurance policy? The household should not buy this policy. What is the actuarially fair price for the insurance policy? If the insurance is fair, then the cost of the insurance policy is $ 1400. (Enter your response rounded to two decimal places.) What is the most the household is willing to pay for an insurance policy that fully covers it against loss? The most the household would pay for such a policy (p) is S (Enter your response rounded to two decimal places.)
Tom and Jerry are room mates. They spend a total of 80 hours a week together in their room. Tom likes loud music, even when he sleeps. His utility function is UT(CT, M) = CT + M, where CT is the number of cookies he eats per week and M is the number of hours of loud music per week that is played while he is in their room. Jerry hates all kinds of music. His utility function is M² 12 UJ = CJ Every week, Tom and Jerry each get 12 chocolate chip cookies sent from home. They have no other source of cookies. We can describe this situation with a box that looks like an Edgeworth box. The box has cookies on the horizontal axis and hours of music on the vertical axis. Let the bottom-left corner be the origin for Tom, and the bottom-right corner be the origin for Jerry. Suppose the dorm's policy is "rock-n-roll is good for the soul." Thus, M=80 in the initial endowment. Consider a trade between Tom and Jerry: Jerry gives Tom one cookie for reducing one hour of music. Then the change in Jerry's…
John is deciding whether to exert effort (e = 1) to avoid an accident at work or not exert any effort (e = 0). If e = 1, the probability of an accident is 0.5. If e = 0, the probability of an accident is 1. John's income without the accident is $100. In case of an accident, medical expenses will be $64. John utility of income is VI. The cost of effort, C(e), is 0 if effort is e = 0 and 1 if effort is e = 1. John's utility function is u(l, e) 3D VI — С(e). %3D (a) What are the expected utility values that John would face when he exerts effort and when he does not exert effort? Based on your calculations, should he exert effort? Briefly explain the intuition behind his decision in one or two sentences. Now suppose there is a risk neutral insurance company. Suppose the insurance company cannot monitor whether John exerts effort or not. The insurance company considers two plan contracts. Contract Plan A: Premium: p = $36. Payout in the event of accident: d = $64 Contract Plan B: Premium: p…
John is deciding whether to exert effort (e = 1) to avoid an accident at work or not exert any effort (e = 0). If e = 1, the probability of an accident is 0.5. If e = 0, the probability of an accident is 1. John's income without the accident is $100. In case of an accident, medical expenses will be $64. John utility of income is VI. The cost of effort, C(e), is 0 if effort is e = 0 and 1 if effort is e = is u(1, e) = VI – C(e). 1. John's utility function (a) What are the expected utility values that John would face when he exerts effort and when he does not exert effort? Based on your calculations, should he exert effort? Briefly explain the intuition behind his decision in one or two sentences. Now suppose there is a risk neutral insurance company. Suppose the insurance company cannot monitor whether John exerts effort or not. The insurance company considers two plan contracts. Contract Plan A: Premium: p = $36. Payout in the event of accident: d = $64 Contract Plan B: Premium: p =…

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