{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

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

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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 returns to scale . With diminishing returns to a factor of production, look at how the marginal product of a factor varies, holding the other factors constant. The concept of diminishing returns to a factor of production implies that eventually the marginal product of the factor declines.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}