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ch12
Multiple Choice
OMIT highlighted questions
Identify the choice that best completes the statement or answers the question.
____
1.
Billy has a von NeumannMorgenstern utility function
U
(
c
)
. If Billy is not injured this season, he will
receive an income of 25 million dollars. If he is injured, his income will be only 10,000 dollars. The probabil
ity that he will be injured is .1 and the probability that he will not be injured is .9. His expected utility is
a.
4,510 dollars.
b.
between 24 and 25 million dollars.
c.
100,000 dollars.
d.
9,020 dollars.
e.
18,040 dollars.
____
2.
Willy’s only source of wealth is his chocolate factory. He has the utility function
,
where
p
is the probability of a flood, 1 –
p
is the probability of no flood, and
c
f
and
c
nf
are his wealth contin
gent on a flood and on no flood, respectively. The probability of a flood is
p
=
. The value of Willy’s
factory is $500,000 if there is no flood and 0 if there is a flood. Willy can buy insurance where if he buys $
x
worth of insurance, he must pay the insurance company $
whether there is a flood or not, but he gets
back $
x
from the company if there is a flood. Willy should buy
a.
no insurance since the cost per dollar of insurance exceeds the probability of a flood.
b.
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 Spring '09
 AVRINRAD
 Utility

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