Danielle has the following VonNeumaan-Morgenstern utility function with v(c) = c
ID: 1195855 • Letter: D
Question
Danielle has the following VonNeumaan-Morgenstern utility function with v(c) = c1/2. (i.e. If there are only two possible states of the world with probalilites IIL and IIH and consumption levels cL and cH, expected utility will be IILcL1/2 + IIHcH1/2) She is a soccer player. If she does not get injured at all she will get $40,000 a month to play. There is a 20% chance she may be injured and only make $1,600 a month instead.
A) What is her expected consumption?
B) Someone offers her a coaching job where she will get $10,000 a month without any risk of injury. Will she exce-t this job?
C) She is thinking about buyinh insurance against injury. What is the fair price for her insurance and how much insurace will she buy at this fair price?
Explanation / Answer
v(c) = 0.8 * 40,000 * 0.5 + 0.2 * 1,600 * 0.5 = 16,160
As v(c) in case of a soccer player is greater than earnings($10,000) in the safe job, she will not accept the job as coach
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.