William buys a car at $100,000, but if there is flood, his car will be worth...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
William buys a car at $100,000, but if there is flood, his car will be worth $20,000 only. He is risk averse and chooses to insure his car fully against floods at a fair premium of $4,000. His utility of consuming c is U(c) = √c and his income is $100,000. Let Cf denote his consumption in the case of a flood and cnf his consumption in the case of no flood. a. b. C. d. If the insurance price is fair and William insures fully, what is the probability of flood? Explain. Find William's von-Neumann-Morgenstern utility function and budget constraint. Calculate William's optimal state-contingent consumption bundle. Explain your answer. Explain graphically the information in (b) and (c) that imply risk aversion. ( William buys a car at $100,000, but if there is flood, his car will be worth $20,000 only. He is risk averse and chooses to insure his car fully against floods at a fair premium of $4,000. His utility of consuming c is U(c) = √c and his income is $100,000. Let Cf denote his consumption in the case of a flood and cnf his consumption in the case of no flood. a. b. C. d. If the insurance price is fair and William insures fully, what is the probability of flood? Explain. Find William's von-Neumann-Morgenstern utility function and budget constraint. Calculate William's optimal state-contingent consumption bundle. Explain your answer. Explain graphically the information in (b) and (c) that imply risk aversion. (
Expert Answer:
Answer rating: 100% (QA)
Utility w 5e where e 1 when he drive safely 0 for drive aggressive... View the full answer
Related Book For
Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young
Posted Date:
Students also viewed these economics questions
-
You have decided to divide a factory into cost centers. How would you allocate depreciation expense on the factory building to its individual cost centers?
-
You have decided to open a Segway Personal Transporter (PT) rental shop on your campus. A Segway PT is a two-wheeled electric personal transportation system that enables a person to move around more...
-
You have decided to form a new start-up company developing applications for the iPhone. Give examples of the three distinct types of financial decisions you will need to make.
-
The following display appeared in USA Today (June 29, 2009). It is meant to be a bar graph of responses to the ques-tion shown in the display. a. Is response to the question a categorical or...
-
Find the power provided by the source and the current through the \(68-\mathrm{k} \Omega\) resistor in Figure \(\mathrm{P}_{2}-25\). Px. 5 A 22 33 68
-
How many degrees of freedom are there? Exercises 49 refer to the following data: Electric motors are assembled on four different production lines. Random samples of motors are taken from each line...
-
Consider the following project activities: a. Draw the project network diagram. b. Identify all the paths through the network and their lengths. c. Identify all the critical activities and path(s)....
-
Use limits involving to to describe the asymptotic behavior of the function from its graph. (If the limit is infinite, enter 'o' or '-', as appropriate. If the limit does not otherwise exist, enter...
-
Direct and indirect labour: manufacturer Sharpedge Cutlery manufactures kitchen knives. One of the employees. whose job is to cut out wooden knife handles, worked 49 hours during a week in January....
-
A large number n of investors make a joint investment (of 1 unit each) which yields a return r > 1 (per unit invested) if it matures. For the project to mature requires that at least L, 1 < L < n,...
-
As seen during the financial crisis of the 1930s and in recent history, markets are globally interconnected. Aside from financial markets, different countries have different resources. Choose a...
-
How to provide a client a targeting marketing camping generator for his hotel. They want to get bookings in a region/city.state where the hotel traffic has been low. How to created a target with the...
-
How much work is required to lift a 3kg backpack off the floor to a height of 1.3m? If you lift the backpack in 2s, how much power did you generate? If you then drop the backpack, what is its change...
-
You have concluded that next year the return on a stock would have the following distribution. Economic Status Probability Weak Economy 0.15 Static Economy Strong Economy 0.60 0.25 Rate of Return -5%...
-
Larned Corporation recorded the following transactions for the just completed month. Purchased $ 7 3 , 0 0 0 of raw materials on account. $ 7 1 , 0 0 0 in raw materials were used in production. Of...
-
Suppose the expected return on the market is 14%, market volatility is 27%, and the risk-free rate is 2%. a. Suppose stock A has a beta of 1.25. According to the CAPM, what is its expected return?...
-
2. Assume a person bends forward to lift a load "with his back" as shown in Figure P12.42a. The person's spine piv- ots mainly at the fifth lumbar vertebra, with the principal supporting force...
-
What is the net promoter score and why is it recommended for use by companies?
-
Sensitivity analysis Sensitivity analysis is an important component of any budgeting exercise. Which estimates do you think will be most crucial in developing a master budget? Why?
-
Balanced Scorecard or activity-based costing Suppose an organization has not implemented either activity-based costing or a Balanced Scorecard but believes both would be valuable for the...
-
Describe how to determine the \(x\) component of the position of an object at a specific instant, given (a) a graph of position \(x\) as a function of time \(t\) and (b) an equation for \(x(t)\).
-
In an \(x(t)\) curve, what is the significance of a steep slope as opposed to a gentle slope? What is the significance of a curve that slopes downward as you move from left to right along the time...
-
The \(x\) component of a car's velocity increases from 0 to \(+5.0 \mathrm{~m} / \mathrm{s}\) in \(1.0 \mathrm{~s}\), and then from \(+5.0 \mathrm{~m} / \mathrm{s}\) to \(+10 \mathrm{~m} /...
Study smarter with the SolutionInn App