ps9sol_09 - Cornell University Economics 3130 Problem Set 9...

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Cornell University Economics 3130 Problem Set 9 Solutions 1. True/False/Explain. State whether each of the following is true or false, and explain why. Please limit your answers to no more than two sentences. All credit is based on the explanation. (a) If insurance is not actuarially fair, a risk-averse consumer will purchase no insur- ance. 1. Andy is seen to place an even-money $100,000 bet on Cornell to beat the Missouri in the first round of the NCAA tournament. If Andy’s utility is u ( y ) = y 0 . 5 and if his current wealth is $1,000,000, what must he believe the minimum probability that Cornell will win is? In your answer be sure to list the states of nature. (Note: “Even-money” means that Andy gets double the bet if Cornell wins and zero if we lose.) The states of nature are: 1) Cornell wins and 2) Cornell loses. He must believe they will win with a probability of at least 51.3%. Solve this by requiring that the expected utility of taking the bet is greater than the expected utility of not taking the bet. In
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ps9sol_09 - Cornell University Economics 3130 Problem Set 9...

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