Simon has current wealth of $36, including $20 in cash. With probabil- ity Simon's money will...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Simon has current wealth of $36, including $20 in cash. With probabil- ity Simon's money will be stolen (contingency 1), leaving him with only $16 to spend on consumption, and with probability his cash will not be stolen (contingency 2) so he can spend the entire $36 on consumption. Simon has utility function u (.02) = 5 + where c is consumption spending in contingency i. (a) What is the expected value of Simon's contingent consumption? (b) What is the expected utility of Simon's contingent consumption? (c) What is Simon's MRS at his current contingent consumption bun- dle? (d) An insurance company offers to fully insure Simon against the risk of theft for a premium (price) of SP. That is, if Simon pays SP to the insurance company, then the insurer will replace Simon's $20 in contingency 1. If Simon buys the insurance his contingent consumption bundle is therefore (36-P, 36-P). i. What is Simon's MRS at the fully insured contingent con- sumption bundle? ii. At what value of P would the insurer make zero expected profit were Simon to buy the insurance? iii. Would Simon buy the insurance at the price you identified in (ii)? Be sure to explain your answer. iv. At what value of P would Simon be indifferent about buying the insurance or not? What is the insurer's expected profit at this premium? v. Draw a CC diagram showing Simon's contingent consump- tion without insurance and his contingent consumption with insurance at the premium you computed in (iv). Sketch Si- mon's indifference curve through each point. Be as accurate as possible, and make sure your diagram is consistent with your answers to the previous parts of this question. 2 Simon has current wealth of $36, including $20 in cash. With probabil- ity Simon's money will be stolen (contingency 1), leaving him with only $16 to spend on consumption, and with probability his cash will not be stolen (contingency 2) so he can spend the entire $36 on consumption. Simon has utility function u (.02) = 5 + where c is consumption spending in contingency i. (a) What is the expected value of Simon's contingent consumption? (b) What is the expected utility of Simon's contingent consumption? (c) What is Simon's MRS at his current contingent consumption bun- dle? (d) An insurance company offers to fully insure Simon against the risk of theft for a premium (price) of SP. That is, if Simon pays SP to the insurance company, then the insurer will replace Simon's $20 in contingency 1. If Simon buys the insurance his contingent consumption bundle is therefore (36-P, 36-P). i. What is Simon's MRS at the fully insured contingent con- sumption bundle? ii. At what value of P would the insurer make zero expected profit were Simon to buy the insurance? iii. Would Simon buy the insurance at the price you identified in (ii)? Be sure to explain your answer. iv. At what value of P would Simon be indifferent about buying the insurance or not? What is the insurer's expected profit at this premium? v. Draw a CC diagram showing Simon's contingent consump- tion without insurance and his contingent consumption with insurance at the premium you computed in (iv). Sketch Si- mon's indifference curve through each point. Be as accurate as possible, and make sure your diagram is consistent with your answers to the previous parts of this question. 2
Expert Answer:
Answer rating: 100% (QA)
a Expected value of Simons contingent consumption Ptheft 05 Consumption if ... View the full answer
Related Book For
Smith and Roberson Business Law
ISBN: 978-0538473637
15th Edition
Authors: Richard A. Mann, Barry S. Roberts
Posted Date:
Students also viewed these economics questions
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
Consider a person with an income of w = 10, 000. There are two states: in state 1, the person receives the entire 10,000, and in state 2, the person suffers an accident and incurs a loss L = 6400....
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
1. a. b. C. d. e. MULTIPLE CHOICE The ratio percentage of earnings retained is the same as that termed: dividend yield dividend payout 2. a. b. C. d. e. UIBS C. d. e. 4. a. b. C. d. e. Class Work 1...
-
Measurements of the activity of a radioactive sample have yielded the following results. Plot the activity as a function of time, using semilogarithmic paper, and determine the decay constant and...
-
How many numbers greater than four million can be formed from the digits 2, 3, 4, 4, 5, 5, 5?
-
How can trade facilitation benefit global logistics?
-
The Hull Petroleum Company and Inverted V are retail gasoline franchises that compete in a local market to sell gasoline to consumers. Hull and Inverted V are located across the street from each...
-
direction and 0 Find magnitude, resultant for the system of forces 20 kN 25 kN location of of the 60 30 A B shown in figure. 3 m D 3 m C 45 18 kN 12 kN
-
The field is less sharply defined. There is heavier use of economics, decision sciences, and behavioral sciences. Identify the branch of accounting described in the quotation.
-
Carina Cooks has been employed by Realfood Restaurant Group (RRG) for around 3 years. Cooks was first hired as a line cook. After seeing Cooks potential, Cooks was quickly promoted to Sous Chef. At...
-
How do conflict resolution practitioners apply principles of restorative justice and transformative mediation to facilitate reconciliation, healing, and constructive dialogue among individuals and...
-
How do scholars of conflict resolution integrate principles of game theory and decision analysis to model and predict the dynamics of strategic interactions between conflicting parties in complex...
-
Write a java AWT program to create a Frame window by extending Frame Class. It should have the following components, as given in the figure. You suppose to create 3 Labels, 3 TextFields, and 2...
-
Calculate the required variables Average Average Average Output Fixed cost Variable cost Total cost fixed cost variable cost total cost Marginal cost 160 20 1 140 60 200 2 The Fixed Cost at Output 2...
-
A single person with a taxable income of $172960 will have the first $9,525 of that income taxed at a different rate than the income between $9,525 and $38,700. The first bracket is taxed at 10%, the...
-
Fill in the table below with your two WTP calculations. WTP WTA High Risk Aversion Low Risk Aversion 750 Notice insurers' willingness to accept (WTA) for insurance is the same for both types of...
-
Portal Manufacturing has total fixed costs of $520,000. A unit of product sells for $15 and variable costs per unit are $11. a). Prepare a contribution margin income statement showing predicted net...
-
Civil Code 1719, subdivision (a) provides in part that any person who draws a check that is dishonored due to insufficient funds shall be liable to the payee for the amount owing upon the check and...
-
Civil Code 1719, subdivision (a) provides in part that any person who draws a check that is dishonored due to insufficient funds shall be liable to the payee for the amount owing upon the check and...
-
The principal purpose of the Bankruptcy Code is to grant a fresh start to the honest but unfortunate debtor. [Citation.] Both Chapter 7 and Chapter 13 of the Code permit an insolvent individual to...
-
Under what conditions are the Exempt Model and Pension Model equivalent? Under what conditions would one model perform better than the other? How does the \($6,500\) limitation on deductible and Roth...
-
Suppose a bond is taxable for both federal and state purposes. Let Rb = the BTROR on the bond, tfed = the federal tax rate, and tst = the state tax rate. Determine the ATROR (i.e., after federal and...
-
Harry wants to contribute either \($6,500\) (BT\($)\) to a traditional deductible IRA or \($6,500\) (AT\($)\) to a Roth IRA. His current tax rate is 30% for ordinary income and 15% for capital gains....
Study smarter with the SolutionInn App