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Author Question: Describe how the risk premium for a person with a convex utility function is determined. What ... (Read 68 times)

jessicacav

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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
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bpool94

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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.


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