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jademouse708Lv1

2 Dec 2020

ABC plays football with the DEF Club in Mexico. If he does not suffer any injury by the end of the season, he will get a professional contract with GHI, which is worth 10,000 euros. If he is injured, he will get a contract as a fitness trainer in Ecuador, which is only worth 100 euros. The probability of suffering an injury is 10%. He is likely to get through the season unscathed with a 90%-probability.

- Describe the gamble. How high is the expected value of this gamble?
- How high is the expected utility, if his Bernoulli utility function of the VNM-utility function is u(x)=x^0.5?
- Assuming he could buy insurance at the price P that would pay him 9,900 euro in the case of an accident, how high could the maximal value of P be for ABC to still afford the insurance?
- Interpret the certainty equivalent. How high is the certainty equivalent c of the above gamble?
- Calculate the coefficients of absolute risk aversion and interpret it. Is that a case of decreasing absolute risk aversion?

ABC plays football with the DEF Club in Mexico. If he does not suffer any injury by the end of the season, he will get a professional contract with GHI, which is worth 10,000 euros. If he is injured, he will get a contract as a fitness trainer in Ecuador, which is only worth 100 euros. The probability of suffering an injury is 10%. He is likely to get through the season unscathed with a 90%-probability.

- Describe the gamble. How high is the expected value of this gamble?
- How high is the expected utility, if his Bernoulli utility function of the VNM-utility function is u(x)=x^0.5?
- Assuming he could buy insurance at the price P that would pay him 9,900 euro in the case of an accident, how high could the maximal value of P be for ABC to still afford the insurance?
- Interpret the certainty equivalent. How high is the certainty equivalent c of the above gamble?
- Calculate the coefficients of absolute risk aversion and interpret it. Is that a case of decreasing absolute risk aversion?

Retselisitsoe PokothoaneLv10

6 Jan 2021