This preview shows page 1. Sign up to view the full content.
Economics 1100: Intermediate Microeconomics
Spring 2011
Problem Set 8
1.
Assume Johnny's utility function is
a
W
W
U
=
)
(.
a.
For what values of
a
is he risk averse, risk neutral, and risk loving?
From now on, assume that
a
= ½. Johnny owns a house that would cost $100,000 to replace should it
ever be destroyed by fire. There is a 0.1% chance that the house could be destroyed during the course of
a year.
b.
How much would fair insurance cost that completely replaces the house if destroyed by fire?
c.
Assuming that Johnny has no other wealth, how much would Johnny be willing to pay for such an
insurance policy?
2.
Alvin's utility function is
U(W) = W
. Barry's utility function is
U(W) = W
2
. Carl's utility function is
W
W
U
=
)
(
. Each has wealth of only $100. An investment of that $100 has a 10% chance of netting
$1,000 and a 90% chance of netting a loss of that $100. Who among the three will make the investment?
3.
Lori, who is risk averse, has two pieces of jewelry, each worth $400. She wants to send them to her sister
in Mexico. She is concerned about the safety of shipping them. She believes that the probability that a
This is the end of the preview. Sign up
to
access the rest of the document.
This note was uploaded on 03/10/2012 for the course ECON 1100 taught by Professor Unver during the Spring '06 term at Pittsburgh.
 Spring '06
 Unver
 Microeconomics, Utility

Click to edit the document details