« previous next »

Author Question: Describe how the risk premium for a person with a convex utility function is determined. What ... (Read 78 times)

jessicacav

  • Hero Member
  • *****
  • Posts: 558
on: Jul 1, 2018
Describe how the risk premium for a person with a convex utility function is determined.
 
  What will be an ideal response?

Question 2

What type of risk behavior does the person exhibit who is willing to pay 5 for the chance to bet 60 on a game where 20 of the time the bet returns 100, and 80 of the time returns 50? Explain.
 
  What will be an ideal response?
Microeconomics ¦ Perloff ¦ 8th Edition
Buy Test-Bank


bpool94

  • Sr. Member
  • ****
  • Posts: 354
Reply #1 on: Jul 1, 2018
Answer to Question 1

A person with a convex utility function is risk preferring. This person will not pay a premium to avoid risk. The risk premium is zero.

Answer to Question 2

This person is risk preferring. The bet is fair. The expected wealth of the person is the same whether or not the bet is made. However, this person is willing to pay 5 to make this fair bet.


Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
« previous next »
 

Did you know?

Certain chemicals, after ingestion, can be converted by the body into cyanide. Most of these chemicals have been removed from the market, but some old nail polish remover, solvents, and plastics manufacturing solutions can contain these substances.

Did you know?

Computer programs are available that crosscheck a new drug's possible trade name with all other trade names currently available. These programs detect dangerous similarities between names and alert the manufacturer of the drug.

Did you know?

Addicts to opiates often avoid treatment because they are afraid of withdrawal. Though unpleasant, with proper management, withdrawal is rarely fatal and passes relatively quickly.

Did you know?

Vaccines cause herd immunity. If the majority of people in a community have been vaccinated against a disease, an unvaccinated person is less likely to get the disease since others are less likely to become sick from it and spread the disease.

Did you know?

Your chance of developing a kidney stone is 1 in 10. In recent years, approximately 3.7 million people in the United States were diagnosed with a kidney disease.

The structure of stomatal guard cells affects their function. The structure of stomatal guard cells affects their function.
Older adults may grieve intensely over the loss of a person or situation that has been a part of the Older adults may grieve intensely over the loss of a person or situation that has been a part of the
miRNA function in limb development miRNA function in limb development
Glycoprotein IIb/IIIa receptor activation of platelet function. Glycoprotein IIb/IIIa receptor activation of platelet function.
How to plot a sine function containing an amplitude and phase shift (Question 1 of 3) How to plot a sine function containing an amplitude and phase shift (Question 1 of 3)
Food security per person Food security per person
Video: Glycolysis - and oxygen

For a complete list of videos, visit our video library