Karl-Heinz runs the BBQ place Fette Sau in Silver Lake. His place is going reasonably well...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Karl-Heinz runs the BBQ place "Fette Sau" in Silver Lake. His place is going reasonably well but he is worried about a fire that could ruin his inventory including the high-end sausages and the pork belly that he is selling. His wealth equals $1,000,000 and he figures that with 56.25 percent probability he loses inventory worth $640,000. His utility over wealth is given by U(W) = √W with, for example, ✓(1,000,000)=1,000 U (1,000,000) U (810,000) U (680, 625) = U (640,000) = U (600, 625) U (490,000) 700 U(422,500) - 650 U (360, 000) = 600 U (302,500) = 550 U (250,000) = 500 1. What is Karl-Heinz's expected wealth? What is Karl-Heinz's expected utility? (15 Points) 900 825 800 775 2. Draw Karl-Heinz's utility function in a diagram that has his wealth on the x-axis and his utility on the y-axis. Indicate his utilities in case of a fire and in the absence of a fire. Also indicate his expected utility and his expected wealth. Show graphically how the expected utility and the expected wealth depend on the loss probability. (20 points) 3. Karl-Heinz is considering buying an insurance that would cover his losses in the event of the fire against a fixed premium. What would be the "fair" premium? (15 points) 4. How much would Karl-Heinz be willing to pay for the insurance? Does it exceed the "fair" premium and if so why? Display Karl-Heinz's willingness to pay for insurance graphically. (15 points) 1 5. Suppose there are two insurance policies A and B. A offers full insurance at a premium of $391,600. Policy B charges a premium of only $360,000 but only offers a payout of $608,400 in the event of a fire. Which policy does Karl-Heinz prefer? (15 points) 6. Suppose policies A and B start engaging in Bertrand price competition, will B price out policy A or vice versa and at what premium? (20 points) Karl-Heinz runs the BBQ place "Fette Sau" in Silver Lake. His place is going reasonably well but he is worried about a fire that could ruin his inventory including the high-end sausages and the pork belly that he is selling. His wealth equals $1,000,000 and he figures that with 56.25 percent probability he loses inventory worth $640,000. His utility over wealth is given by U(W) = √W with, for example, ✓(1,000,000)=1,000 U (1,000,000) U (810,000) U (680, 625) = U (640,000) = U (600, 625) U (490,000) 700 U(422,500) - 650 U (360, 000) = 600 U (302,500) = 550 U (250,000) = 500 1. What is Karl-Heinz's expected wealth? What is Karl-Heinz's expected utility? (15 Points) 900 825 800 775 2. Draw Karl-Heinz's utility function in a diagram that has his wealth on the x-axis and his utility on the y-axis. Indicate his utilities in case of a fire and in the absence of a fire. Also indicate his expected utility and his expected wealth. Show graphically how the expected utility and the expected wealth depend on the loss probability. (20 points) 3. Karl-Heinz is considering buying an insurance that would cover his losses in the event of the fire against a fixed premium. What would be the "fair" premium? (15 points) 4. How much would Karl-Heinz be willing to pay for the insurance? Does it exceed the "fair" premium and if so why? Display Karl-Heinz's willingness to pay for insurance graphically. (15 points) 1 5. Suppose there are two insurance policies A and B. A offers full insurance at a premium of $391,600. Policy B charges a premium of only $360,000 but only offers a payout of $608,400 in the event of a fire. Which policy does Karl-Heinz prefer? (15 points) 6. Suppose policies A and B start engaging in Bertrand price competition, will B price out policy A or vice versa and at what premium? (20 points)
Expert Answer:
Answer rating: 100% (QA)
Here is my analysis of KarlHeinzs situation 1 KarlHeinzs expected wealth 1056251000000 0562510562564... View the full answer
Related Book For
Intermediate Accounting IFRS
ISBN: 978-1119372936
3rd edition
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
Posted Date:
Students also viewed these economics questions
-
Pico plc has borrowed heavily in euros and is worried about increasing interest rates in the eurozone. The Finance Director suggests that Pico plc should sell futures on French bonds (known as OATs...
-
Use the attached "words.txt" file to store the words along with their ranks in an AVL tree. Then provide the user the option to search for any word. If the word exists the program displays the rank...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Your friend has just started a retail clothing store in kamloops. She will be purchasing inventory to make her own clothing (One Style) and she will also be buying ready to sell iteams. She has come...
-
Woldenga Equipment Inc. reported the figures shown below for 2014 and 2013. ____________________________________2014 2013 Income statement: Interest expense.............$ 5,200.$ 3,700 Net...
-
According to a study, 76% of adults ages 1829 years had broadband Internet access at home in 2011. A researcher wanted to estimate the proportion of undergraduate college students (1823 years) with...
-
How to identify subject matter jurisdiction?
-
Paul Smith is opening a plumbing supply store in University City. He plans to sell plumbing parts and materials to both wholesale and retail customers. Since contractors (wholesale customers) prefer...
-
On 1 May 2015, your company acquired a machine at a cost of $300,000. This machine has an expected a useful life of 20 years in normal conditions, and a residual amount of $10,000. The financial year...
-
Read the Whirlpool Case Study and answer the question: Examine the drivers of supply chain in whirlpool
-
A country increases its indirect tax rate. Using a Lorenz curve diagram, explain how this may impact the country's distribution of income. (HL and SL)
-
At what loss of volume should you take action to enable the sustainability of the organization and its long-term mission? What steps can you take to align expenses with anticipated volumes without...
-
How does a repurchase agreement that a bank might enter into with a securities dealer regarding a U.S. Treasury bill substitute for the borrowing of federal funds from another bank?
-
Based on the healthcare landscape of Yemen provided in this chapter, what would be your leadership approach to managing the crises there? What strategies could a doctorally prepared nurse use to...
-
The project to bring your organization to an overseas country is gaining momentum. Pick a country not featured in this chapter, and determine whether your chosen country has healthcare disparities...
-
Which of the following statements is true of financial accounting? Select one: a. Financial accounting is able to provide audited, objective financial information. b. Financial accounting is directed...
-
(a) With not more than 300 words, examine why Malaysia missed its 2020 targets to divert 40% of waste from landfills and increase recycling rates to 22%. (10 marks) b) Why arent Malaysian recycling?...
-
The Z-score bankruptcy prediction model uses statement of financial position and income information to arrive at a Z-Score, which can be used to predict financial distress: EBIT is earnings before...
-
Discuss the accounting treatment or disclosure that should be accorded a declared but unpaid cash dividend; an accumulated but undeclared dividend on cumulative preferred stock; a stock dividend...
-
Selected accounts of Leno Company are shown below. InstructionsFrom an analysis of the T-accounts, reconstruct (a) The October transaction entries, (b) The adjusting journal entries that were made on...
-
Solve Chapter Problem 13.21, assuming the force is narrowband with a power spectral density given by \(S_{F}(\omega)=\frac{3 \times 10^{-3}}{2+5 \omega^{2}}\). Data From Chapter Problem 13.21: A SDOF...
-
Solve Chapter Problem 13.21, assuming the power spectral density is band limited with \(\omega_{1}=50 \mathrm{rad} / \mathrm{s}\) and \(\omega_{2}=200 \mathrm{rad} / \mathrm{s}\). Data From Chapter...
-
Fine Leather Ltd has provided the following production and sales information for each pair of its dress shoes. The fixed costs for the period are \($1\) 125 000. Required (a) Calculate the...
Study smarter with the SolutionInn App