ps4x313_s06 - Econ 313 - Wissink Spring 2006 PS#4 - XtraQ...

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1. Suppose there is a 50-50 chance that a risk-averse individual with the utility function u=√($) and with wealth of $20,000 will contract a debilitating disease and suffer a loss of $10,000. a. What is the $expected value? b. What is the expected utility of this probabilistic situation? c. What is the $certainty equivalent? 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? e. Suppose we increase the chances of getting the disease to .75. How will that change the contract and the insuring firm’s expected profit? 2. Contrast the concepts of diminishing returns to scale and diminishing returns to a factor of production. Can a production function exhibit diminishing returns to scale but NOT have diminishing returns to a factor? 3. Suppose the production function for widgets is given by: Q=KL - .8K 2 - .2L 2 , where Q represents the annual quantity of widgets produced, K
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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.

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