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Unformatted text preview: Explain whether these numbers show the consumer is risk-averse, risk neutral, or risk loving. (1 point) b) Calculate the expected income and expected utility in each of the following situations: i) The consumer has a 5% chance of earning $225 and a 95% chance of earning $81 ii) The consumer has a 49% chance of earning $144 and a 51% chance of earning $36 Explain, using your answer to (a) and the numbers you just calculated which of these situations is riskier. (2 points) c) Consider a consumer in situation (ii) who is offered the following deal from an insurance company: I will pay you $85 today and you give me your income no matter what it is. Explain why this deal is good for the consumer. If there are 100 people like this and the insurance company sells this deal to all of them, find out how much money the insurance company makes on average and use this to explain why they would offer this deal. (2 points)...
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This note was uploaded on 02/28/2011 for the course ECO 304K taught by Professor Hickenbottom during the Spring '10 term at University of Texas at Austin.
- Spring '10