Assume that Simon is an expected utility maximizer with following utility function U(W) = W (a)...

 

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Assume that Simon is an expected utility maximizer with following utility function U(W) = √W (a) Is Simon risk averse? (b) Assume that initially Simon has wealth level 100. However, there is 50% chance that he would experience fire in his house and loose everything. What is expected utility of Simon in this case? (c) Assume that Simon has a friend Garfunkel. Garfunkel also face 50% chance that his house will have fire. The probability of each person having this unfortunate event is independent. Simon and Garfunkel made an arrangement that if one of them loose house in fire and the other one does not, then fortunate person will transfer 36 to unfortunate one. Will they have higher utility under the arrangement? (d) Assume that Simon and Garfunkel are living in the same village. The area has probability of having a big earthquake. Can an arrangement like that of (c) give both agents a higher expected utility than that calculated in (b)? (e) In light of your answers to (a)-(d), explain why it may be easier to insure houses against fires than floods. What kind of arrangement can be made when we have a catastrophic event? Assume that Simon is an expected utility maximizer with following utility function U(W) = √W (a) Is Simon risk averse? (b) Assume that initially Simon has wealth level 100. However, there is 50% chance that he would experience fire in his house and loose everything. What is expected utility of Simon in this case? (c) Assume that Simon has a friend Garfunkel. Garfunkel also face 50% chance that his house will have fire. The probability of each person having this unfortunate event is independent. Simon and Garfunkel made an arrangement that if one of them loose house in fire and the other one does not, then fortunate person will transfer 36 to unfortunate one. Will they have higher utility under the arrangement? (d) Assume that Simon and Garfunkel are living in the same village. The area has probability of having a big earthquake. Can an arrangement like that of (c) give both agents a higher expected utility than that calculated in (b)? (e) In light of your answers to (a)-(d), explain why it may be easier to insure houses against fires than floods. What kind of arrangement can be made when we have a catastrophic event?

Answer rating: 100% (QA)

ANSWER a Simon is risk averse b Simons expected utility in this case is frac12 sqrt100 frac12 sqrt0 ... View the full answer