If a risk‐neutral individual owns a home worth $200,000 and there is a three percent chance the home will be destroyed by fire in the next year, then we know that: a) He is willing to pay much more than $6,000 for full cover. b) He is willing to pay much less than $6,000 for full cover. c) He is willing to pay at most $6,000 for full cover. d) None of the above are correct. e) All of the above are correct.
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If a risk‐neutral individual owns a home worth $200,000 and there is a three percent chance the home will be destroyed by fire in the next year, then we know that:
a) He is willing to pay much more than $6,000 for full cover.
b) He is willing to pay much less than $6,000 for full cover.
c) He is willing to pay at most $6,000 for full cover.
d) None of the above are correct.
e) All of the above are correct.
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- If a risk-neutral individual owns a home worth $200,000 and there is a three percent chance the home will be destroyed by fire in the next year, then we know 15. that: a) He is willing to pay much more than $6,000 for full cover. b) He is willing to pay much less than $6,000 for full cover. c) He is willing to pay at most $6,000 for full cover. d) None of the above are correct. e) All of the above are correct.I am in possession of two coins. One is fair so that it lands heads (H) and tails (T) with equal probability while the other coin is weighted so that it always lands H. Both coins are magical: if either is flipped and lands H then a $1 bill appears in your wallet, but when it lands T nothing happens. You may only flip a coin once per period. The interest rate is i per period. You are risk-neutral and thus only concern yourself with expected values (and not variance). For simplicity, in the questions below assume you will live forever. Suppose now that I also do not know which coin is fair and which is weighted. You pick one of the two coins at random. (a) What is your willingness to pay for this coin? (b) What is your willingness to pay for an option* to purchase the coin, where the option works as follows: you may flip the coin once and observe the outcome. Then, if you wish, you may purchase the coin from me for the amount you determined in part 4(a). *The owner of an option has…If a risk-averse individual owns a home worth $100,000, and that individual is willing to pay $1,000 for an annual fire insurance policy that covers the entire loss in the event of a fire, then we know that?
- I am in possession of two coins. One is fair so that it lands heads (H) and tails (T) with equal probability while the other coin is weighted so that it always lands H. Both coins are magical: if either is flipped and lands H then a $1 bill appears in your wallet, but when it lands T nothing happens. You may only flip a coin once per period. The interest rate is i per period. You are risk-neutral and thus only concern yourself with expected values (and not variance). For simplicity, in the questions below assume you will live forever. 1. How much are you willing to pay for such a coin that you know is fair? 2. How much are you willing to pay for such a coin that you know is weighted? 3. I currently own the coins and know which is fair and which is weighted, but you cannot tell which is which. You may make an offer to purchase a coin of your choosing, which I am free to accept or reject. What is the most you are willing to offer? Explain how you arrived at this answer. 4. Suppose now…Ever since the Covid-19 pandemic hit the economy the price of gold has been sky high .Today price per gram of Gold is 5291tk. Imagine yourself as a risk averse investor, explain why you would be more or less willing to buy gold under the following circumstances: a) Prices in the gold market become more volatile. b) An additional tax is imposed on all Government bonds. c)Due to Covid-19 epidemic, the economy experiences a recession. d) You just inherited 1000000tk.Question I am in possession of two coins. One is fair so that it lands heads (H) and tails (T) with equal probability while the other coin is weighted so that it always lands H. Both coins are magical: if either is flipped and lands H then a $1 bill appears in your wallet, but when it lands T nothing happens. You may only flip a coin once per period. The interest rate is i per period. You are risk-neutral and thus only concern yourself with expected values (and not variance). For simplicity, in the questions below assume you will live forever. 1. How much are you willing to pay for such a coin that you know is fair? 2. How much are you willing to pay for such a coin that you know is weighted? 3. I currently own the coins and know which is fair and which is weighted, but you cannot tell which is which. You may make an offer to purchase a coin of your choosing, which I am free to accept or reject. What is the most you are willing to offer? Explain how you arrived at this answer. 4.…
- John owns and runs a food truck, which he expects to increase his wealth to $40,000 this year. John knows that every year, there is a 20% chance that his truck will be firebombed by one of his ruthless food truck competitors. If this happens, he will face a bill of $10,000 in repairs and lost income. John can choose to get insurance to cover all repair costs and lost wealth. Use this information and the information in the table and graph to answer the questions. Total utility Wealth Total utility (utils) 730 1000 $32,000 900 $34,000 755 800 700 $36,000 785 600 792 500 $38,000 400 300 200 100 0 $5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000 Wealth What is John's expected wealth? expected wealth: $ What is the price for John's insurance? price of insurance: $ What is John's expected utility without insurance? expected utility: 730 If John chooses to pay the insurance policy price, what would be his total utility? total utility: 1030 42000 10000 utils utilsAny risk-averse individual would always (Select all that applies) a) take a 30% chance at $100 rather than a sure $20. b) take a sure $20 rather than a 30% chance at $100. c) take a sure $2 rather than a 50% chance at $5 and a 50% chance at losing $1. d) take a 50% chance at $5 and a 50% chance at losing $1 rather than a sure $1.Suppose you have a house worth $200,000 (wealth). Your utility of wealth is given by U(w) = ln(w). There is a small chance that a fire will damage your house causing a loss of $75,000. You estimate there is a 2% chance of fire. a) What is your expected wealth? b) What is your expected utility from owning the house? c) Suppose you can add a fire detection/prevention system to your house. This would reduce the chance of a bad event to 0 but it would cost you $C to install. What is the most you are willing to pay for the security system? (Here is an identity you will find useful
- 5. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = √x. There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. I Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?The value of a successful project is $420,000; the probabilities of success are 1/2 with good supervision and 1/4 without. The manager is risk neutral, not risk averse as in the text, so his expected utility equals his expected income minus his disutility of effort. He can get other jobs paying $90,000, and his disutility for exerting the extra effort for good supervision on your project is $100,000. (a) Show that inducing high effort would require the firm to offer a compensation scheme with a negative base salary; that is, if the project fails, the manager pays the firm an amount stipulated in the scheme. (b) How might a negative base salary be implemented in reality? (c) Show that if a negative base salary is not feasible, then the firm does better to settle for the low-pay, low-effort situation.Asap
