« previous next »

Author Question: Describe how the risk premium for a person with a convex utility function is determined. What ... (Read 59 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?

There are more sensory neurons in the tongue than in any other part of the body.

Did you know?

If you use artificial sweeteners, such as cyclamates, your eyes may be more sensitive to light. Other factors that will make your eyes more sensitive to light include use of antibiotics, oral contraceptives, hypertension medications, diuretics, and antidiabetic medications.

Did you know?

Illicit drug use costs the United States approximately $181 billion every year.

Did you know?

Most fungi that pathogenically affect humans live in soil. If a person is not healthy, has an open wound, or is immunocompromised, a fungal infection can be very aggressive.

Did you know?

Throughout history, plants containing cardiac steroids have been used as heart drugs and as poisons (e.g., in arrows used in combat), emetics, and diuretics.

Transporters that function as pumps. Transporters that function as pumps.
Structure and function of a chemical synapse. Structure and function of a chemical synapse.
Letter from a Person with Pure Alexia Letter from a Person with Pure Alexia
Monopoly, patented in 1935, was an instant best-seller: Players risk all their assets in an attempt Monopoly, patented in 1935, was an instant best-seller: Players risk all their assets in an attempt
Brushing off to finish-back. In a quiet voice ask the person to sit up with legs off the side of the ... Brushing off to finish-back. In a quiet voice ask the person to sit up with legs off the side of the ...
Describe the Conceptual Forecasting Framework in your own words. Describe the Conceptual Forecasting Framework in your own words.
Video: Calvin Cycle Explained!

For a complete list of videos, visit our video library