Question

3. Solve following questions. U VM. M is your house value. If there is a flood,your house value is 64 If there is no flood, you house value is 100 (a) What is expected income? (b) What is expected utility? (c) What is utility of expected income? (d) Calculate 'certainty equivalent' and 'risk premium'. (e) Draw the given situation with two graphs you learned in the lecture

Answer 1

9inen prrtlm here the utt ty fr comi der the sengumer giuen by whene of the m hon Yalu". hane is "64 L m of Yalu is 1r Now, uts Now thevalu anune that flood th " he hu tmtabitty that fler there mil he i grem by enpeutad ) Theom the EY- P (6u) +160 (1-P) EY= 1036P EY 100- 3/2 82 the enpeet uuttty is grum b1 4le PU(G4) t - P) ulloo) Pdsy (i-P) WIGo Eu- P 8) + P) 10 8P + 10-1o 1P10-2P Eu 10- 2 P Eu g the ubCty f exbectod meome 78 -人ヨ う リル 82 =9.06 Uhuty feapeeteTneome the onpect utOty is grur b u9 ) hune we haue hnd ond tnm com pding te "u=q" 2 L m -81 m

ortuinty uientent e) the gtuin ty m the the ink pimium g by- T EY-m 82-81 = 1 , =) r1 rirh nimim Eu-g 100 amtdr the grum 6' hene mne hae tms alternat u amd prbeb7Tty P-2 =) Exputos ineane is gricen y- EY 82 Cantain ty asuaualint ten ty8a (MON the Rih Paimium c) 7X2-81-1