aps4x313_s06 - Econ 313 - Wissink Spring 2006 PS#4 XtraQ -...

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1. There is a 50-50 chance that an individual with utility u=√($) and with wealth of $20,000 will contract a debilitating disease and suffer a loss of $10,000. a. $expected value = .5*20,000 + .5*10,000 = $15,000. b. the expected utility = .5*√20,000 + .5*√10,000 = .5*141.42 + .5*100 = 120.71 utils c. the $certainty equivalent = 120.71 2 = $14,571 d. Set Wgood=Wbad=$CE=$14,571. So 14571=20000-Prem Prem = $5429. And then, 14571=20000-10000-5429+Ben Ben = $10,000. Expected profit = 5429-(.5*10000)=$429 e. $expected value = .25*20,000 + .75*10,000 = $12,500. expected utility = .25*√20,000 + .75*√10,000 = .25*141.42 + .75*100 = 110.36 utils $certainty equivalent = 110.36 2 = $12,179 Wgood=Wbad=$CE=$12,179. So 12179=20000-Prem Prem = $7821. And then, 12179=20000-10000-7821+Ben Ben = $10,000 Expected profit = 7821-(.75*10000)=$321 2. Diminishing returns to scale implies that if x=f(L,K) and y=f(sL, sK) where s>1, then y<sx. All inputs must be scaled by the same factor, s, in the concept of
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This note was uploaded on 10/29/2009 for the course ECON 3130 taught by Professor Masson during the Fall '06 term at Cornell University (Engineering School).

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aps4x313_s06 - Econ 313 - Wissink Spring 2006 PS#4 XtraQ -...

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