Ch.17 HW - Anthony Marsala EC251H Sec 2 Professor Woodbury...

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Anthony Marsala EC251H Sec. 2 Professor Woodbury Ch. 17 Homework Pg. 602 #14, 15, 17, 22, 26, 28 14. The probability of a house being harmed by fire or high winds is (7+5)/1000 or 0.012. 15. The expected value of the painting is ($1,000 x 0.20) + ($0 x 0.10) + ($500 x 0.70) = $550 17. No, this is not a fair bet because the expected payout for Kristin is (0.33 x $3) = 0.99 and the expected payout for Ryan is (0.67 x $2) = 1.34. 22. a. Sylvia’s expected fine if she travels through NJ is (0.25 x -300) = -75. Her expected wealth is EY = (0.75 x 300) + (0.25 x -300) = 150. Sylvia’s expected utility is EU = EY 0.5 = 150 0.5 = 12.25. b. Sylvia’s expected fine if she travels through PA is (0.50 x -200) = -100. Her expected wealth is EY = (0.50 x 300) + (0.50 x -200) = 50. Sylvia’s expected utility is EU = EY 0.5 = 50 0.5 = 7.07. c. Sylvia is better off taking the NJ route because both her expected wealth and expected utility are greater than those on the PA route. 26. a. Expected loss = (1/36 x $4000) = $111. If the coverage is $150, a wealthy person should not buy insurance because the expected loss is less than the cost of coverage, and even if the car was totaled, a wealthy person could most likely cover it out of pocket.
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