1.Suppose there is a 25% chance that a risk-averse individual with the utility function u=√($) and with initial wealth of $20,000 will contract a debilitating disease and not work and suffer a loss of $10,000 and a 75% chance that the individual will remain healthy and earn $20,000.a.What is the $expected value of this probabilistic situation?b.What is the expected utility of this probabilistic situation?c.What is the $certainty equivalent of this probabilistic situation?d.What are the values of the $premium and $benefit of an insurance contract that leaves the individual ex ante indifferent to buying the contract or taking the risk?2.Suppose both Abe and Betty have very nicely behaved Cobb-Douglas production functions. Suppose that Abe’s production function is: uAbe=f(X, Y). Suppose that Betty’s production function is a monotonic transformation of Abe’s. That is uBetty= g(f(X, Y)) where (dg/df) is positive. Ima Smart insists that Abe and Betty have the same underlying technology then.
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