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Unformatted text preview: him the expected payoﬀ of the gamble, what is the maximum premium he would be willing to pay for it? c -What is the minimum required increase (the probability premium) in the probability of the high-payoﬀ state so that he will not be willing to pay any premium for such an insurance policy? (Note that the insurance policy still pays the expected payoﬀ of the unmodiﬁed gamble) d -Now assume that he is confronted with the gamble (36;16;1/2). Calculate the certainty equivalent, the insurance premium, and the probability premium for this case as well. Explain what is going on, and why? Exercise 4: Consider two investments with the following characteristics. States State 1 State2 State 3 π 1/3 1/3 1/3 Returns e z 10 10 e y 10 20 a -Is there state-by-state dominance between these two investments? b -Is there FSD between these two investments?...
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This note was uploaded on 04/01/2008 for the course ECON 3330 taught by Professor Mbiekop during the Spring '08 term at Cornell University (Engineering School).
- Spring '08