An investor has utility function U(x) = x1/4 for salary. He has a new job offer which pays $80,000 with a bonus. The bonus will be $0, $10,000, $20,000, $30,000, $40,000, $50,000, or $60,000, each with equal probability. What is the certainty equivalent of this job offer?
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Tom Adams has received a job offer from a large investment bank as a clerk to an associate banker. His base salary will be $53,000. He will receive his first annual salary payment one year from the day he begins to work. In addition, he will get an immediate $10,000 bonus for joining the company. His salary will grow at 3.3 percent each year. Each year he will receive a bonus equal to 10 percent of his salary. Mr. Adams...
When W represents the size of the cash, assume the utility function of Alice is given as U(W)=√W. In other words, the size of utility that Alice gets for 40,000$ is U(4)=√4=2. If a financial product sells at the same price of 70,000$, but results in a different profit after one year, let's say one of the followings should be chosen: A - 80,000$(100% Probability) B - 160,000$(50% Probability), 40,000$(50% Probability) (1)According to the expected utility hypothesis, which financial product...
The city government of Grantsburg must choose how to allocate the city budget of $90,000 between units of educational quality (E) and all other public goods (G). The city's prefer- ences (i.e., those of the median voter) over E and G are given by: ! U(E,G) = (1/3) - In(E) + (2/3) • In(G) For simplicity, let the unit prices of E and G both equal $1 so that we can interpret E and Gas levels of spending. The city's...
Brad Adams owns Brad’s Baking business. In the previous year, Brad’s baking had the following statement of revenues and cost. Revenues = $300,000 Supplies = $70,000 Utilities = $10,000 Employee salaries = $20,000 Brad’s salary = $30,000 Brad always has an option of closing his baking business and renting out his building for $60,000 per year. Also, Brad has a job offer from a chain baking business offering him a salary of $50,000 per year and a local baking store...
1. a. Two investors, A and B, are evaluating the same investment opportunity, which has an expected value of £100. The utility functions of A and B are ln(x) and x2, respectively. Which investor has a certainty equivalent higher than 100? Which investor requires the higher risk premium? b. (i) Describe suitable measures of risk for ‘loss-aversion’ and ‘risk aversion’. (ii) Concisely define the term ‘risk neutral’ with respect to a utility function u (w), where w is the realisation...
Billy Pigskin is a football player with a von Neumann-Morgenstern utility function U(c) = c 1/2. If Billy is not injured this season, he will receive an income of $16 million. If he is injured, his income will be only $10,000. The probability that he will be injured is 0.1 and the probability that he will not be injured is 0.9. What is the certainty equivalent of the gamble that Billy is facing? (See the hint to problem 3.)
Consider two investments X and Y, where X pays $0 and $10 with
equal probability and Y pays 0 with probability 0.75 and $20 with
probability 0.25. What investment would an investor choose if her
utility function is
(i) (ii) u(x) = x2 u(x) = u(x) = 1 -e To = X
Larry was accepted at three different graduate schools, and must choose one. Elite U costs $50,000 per year and did not offer Larry any financial aid. Larry values attending Elite U at $60,000 per year. State College costs $30,000 per year, and offered Larry an annual $10,000 scholarship. Larry values attending State College at $40,000 per year. NoName U costs $20,000 per year, and offered Larry a full $20,000 annual scholarship. Larry values attending NoName at $15,000 per year. Larry...
a) (3)) Consider two investments X and Y, where X pays $0 and $10 with equal probability and Y pays 0 with probability 0.75 and $20 with probability 0.25. What investment would an investor choose if her utility function is (0) (ii) (ii) u(x) = x2 u(x) = u(x) = 1-e * = X
You are trying to decide which job offer you should accept. You have the three ottets with the following specifications Option 1: Dell offers a stable salary of $100.000 a year Option 2: A&T has an Artificial intelligent project that has 30% probability to Successfully the project is good you get an annual salary of $250,000. If the project is unsuccessfully iyo n annual salary of $60,000 Option 3: You can start a new business with your friends you have...