1. In decision-making under uncertainty, explain why “expected utility” is preferred to “expected value” in consumer’s optimization. Describe a situation where maximizing “expected utility” and maximizing “expected value” are equivalent.
2. An individual has a utility function represented by U(I)= , where I is her annual income in dollars.
2.1 is the individual risk loving, risk neutral or risk averse?
2.2 Suppose this individual has a current disposable income of $90,000. Suppose that there is one percent (1%) chance that her house may burn down, and if it does, the cost of repairing it will be $80,000. thereby reducing her disposable income to %10,000. Calculate the expected value(income) and expected utility for this individual.
2.3 The individual is offered insurance to protect against the possibility of a fire. What would be a fair insurance premium? If the individual takes up the insurance, what is the maximum amount she should be willing to pay for this insurance?
Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.
You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.Read more
Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.Read more
Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.Read more
Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.Read more
By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.Read more