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Unformatted text preview: the government decides to insure Bob in the following way: no matter what outcome occurs, Bob will receive the expected value of the investment. The government doesn&t charge Bob for this insurance. What is the expected cost to the government of this insurance contract with Bob? (g) Suppose x = 0 . Moreover, Bob is now able to invest any fraction r , with ± r ± 1 , of his $9 in Spri. If he invests $9 r in Spri, then with probability 1 = 4 he receives $36 r , with probability 1 = 4 he receives $16 r , and with probability 1 = 2 he receives $ x 2 r = 0 . Without solving explicitly for r , what is the equation that determines the value of r > at which Bob will be indi/erent between making the investment or not?...
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This note was uploaded on 12/21/2009 for the course ECON 1211 taught by Professor Govel during the Spring '08 term at Columbia.
- Spring '08