Ellen faces a probability of 0.06 percent of having an accident which would impose a loss of $80,000
in damages.
Her future wealth without this accident will be $200,000.
She is risk averse, with utility of
wealth given below.
W
U(W)
100,00
0
256
110,00
0
1280
120,00
0
1792
130,00
0
2048
140,00
0
2176
150,00
0
2240
160,00
0
2272
170,00
0
2288
180,00
0
2296
190,00
0
2300
200,00
0
2302
7.
The minimum premium (assuming zero transaction costs to write the policy) an insurance company
would charge Ellen for insurance against this loss equals _____dollars.
a)
24
b)
32
c)
40
d) 48
8.
The maximum premium Ellen would pay for insurance equals ______ dollars.
a)
1,020
b) 1,190
c)
1,260
d)
1,530
9.
You are participating in an auction with 4 risk neutral bidders (including you).
Independent
valuations of bidders in the auction are uniformly distributed between $500 and $1,500.
If your
valuation of the item is $1,300, your optimal bid in a Dutch Auction format will be:
a) $1,000
b)
$1,100
c) $1,200
d) $1,300
10.
You are participating in an auction with 4 risk neutral bidders (including you).
Independent
valuations of bidders in the auction are uniformly distributed between $500 and $1,500.
If your
valuation of the item is $1,300, your
expected
gain from this auction equals:
415 BLUE Final Exam
2 of 7
Fall 2009