Do 5,6,7 and 16 (skip the rest, as to follow chegg\'s 4 question rule) S. Desnib

Question

Do 5,6,7 and 16 (skip the rest, as to follow chegg's 4 question rule)

S. Desnibe wing words your uncle who's tembe at math can understand eand plcase don' use any technical econ jargon, or you'll totally lose him) the relationship between expected value and certainty equivalent for a risk averse individual. 6. Describe using words that same uncle can understand what is represented by: the expected utility of a prospect, the utility of the expected value of a prospect, and the relationship between those two values for a risk averse individual 7. Describe using words that same uncle can understand why selling insurance can simultaneously be profitable for insurance companies and happiness increasing for the individuals purchasing the insurance, provided the individual is risk averse

Explanation / Answer

16) in perfectly competitive market firm charge price equal to marginal cost i.e p=mc.

mc= differentiation of cost function with respect to q.

so, mc=40q+10

now equate p=mc to get profit maximising level of output.

1200=40q+10

q=297.5

5) for a risk averse individual certainty equivalent of a gamble is less than the gamble's expected monetary value.

6) the expected utility of a prospect is an outcome of the prospect. and the utility of the expected value of prospect is the expected value of outcome. for risk averse individual , the expected utility of a prospect is more than the utility of the expected value of prospect.

7) the selling insurance is profitable for insurance companies because in return they get premium for selling insurance.also the selling insurance increases the happiness of individual who purchase insurance because by puchasing insurance induvidual get insured of not loosing money. by purchasing insurance risk of risk averse individual get minimised.

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