Jenny has a quadratic utility function of the form U(w) w-10 w. She has been offered...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Jenny has a quadratic utility function of the form U(w) w-10 w². She has been offered a job with Company X, in which her salary would depend upon the success or otherwise of the company. If it is successful, which will be the case with probability %, then her salary will be $40,000, whereas if it is unsuccessful she will receive $30,000. (0) (ii) (iii) (iv) (i) (ii) Assuming that Jenny has no other wealth, state the salary range over which U(w) is an appropriate representation of her individual preferences. (iii) (iv) Calculate the expected salary and the expected utility offered by the job. Suppose she was also to be offered a fixed salary by Company Z. Determine the minimum level of fixed salary that she would accept to work for Company Z in preference to Company X. Suppose that Lance and Allan each have a log utility function and an initial wealth of 100 and 200 respectively. Both are offered a gamble such that they will receive a sum equal to 30% of their wealth should they win, whereas they will lose 10% of their wealth should they lose. The probability of winning is %. State whether or not the gamble is fair. Calculate Lance's certainty equivalent for the gamble alone and comment briefly on your answer. Suppose that the owners of Company X are both risk-neutral and very keen that Jenny should join them and not Company Z. Determine whether the firm should agree to pa her a fixed wage, and, if so, how much. Comment briefly on your answer. Repeat part (ii) in respect of Allan and compare your answer with that in part (ii). Confirm that your comments in part (iii) apply irrespective of the individual's wealth. Jayne's utility function can be described as U(w)=√w. She faces a potential loss of £100,000 in the event that her should house burn down, which has a probability of 0.01. (0) Calculate the maximum premium that Jayne would be prepared to pay to insure herself against the total loss of her house if her initial level of wealth was £140,000 and comment on your results. Suppose that UN Life plc has an initial wealth of £100 million and a utility function of the form U(w)=w. Jenny has a quadratic utility function of the form U(w) w-10 w². She has been offered a job with Company X, in which her salary would depend upon the success or otherwise of the company. If it is successful, which will be the case with probability %, then her salary will be $40,000, whereas if it is unsuccessful she will receive $30,000. (0) (ii) (iii) (iv) (i) (ii) Assuming that Jenny has no other wealth, state the salary range over which U(w) is an appropriate representation of her individual preferences. (iii) (iv) Calculate the expected salary and the expected utility offered by the job. Suppose she was also to be offered a fixed salary by Company Z. Determine the minimum level of fixed salary that she would accept to work for Company Z in preference to Company X. Suppose that Lance and Allan each have a log utility function and an initial wealth of 100 and 200 respectively. Both are offered a gamble such that they will receive a sum equal to 30% of their wealth should they win, whereas they will lose 10% of their wealth should they lose. The probability of winning is %. State whether or not the gamble is fair. Calculate Lance's certainty equivalent for the gamble alone and comment briefly on your answer. Suppose that the owners of Company X are both risk-neutral and very keen that Jenny should join them and not Company Z. Determine whether the firm should agree to pa her a fixed wage, and, if so, how much. Comment briefly on your answer. Repeat part (ii) in respect of Allan and compare your answer with that in part (ii). Confirm that your comments in part (iii) apply irrespective of the individual's wealth. Jayne's utility function can be described as U(w)=√w. She faces a potential loss of £100,000 in the event that her should house burn down, which has a probability of 0.01. (0) Calculate the maximum premium that Jayne would be prepared to pay to insure herself against the total loss of her house if her initial level of wealth was £140,000 and comment on your results. Suppose that UN Life plc has an initial wealth of £100 million and a utility function of the form U(w)=w.
Expert Answer:
Answer rating: 100% (QA)
Jennys Utility and Job Offers i Salary Range for Uw A quadratic utility function like Uw w 10w2 is appropriate when the marginal utility of income is positive but diminishing This function reaches a m... View the full answer
Related Book For
Posted Date:
Students also viewed these accounting questions
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
The following additional information is available for the Dr. Ivan and Irene Incisor family from Chapters 1-5. Ivan's grandfather died and left a portfolio of municipal bonds. In 2012, they pay Ivan...
-
Solve the inequality. Write the solution in interval notation. |15 = x < 7
-
An L-C circnit consists of a 60.0-mH inductor and a 250-F capacitor. The initial charge on the capacitor is 6.00 C, and the initial current in the inductor is zero. (a) What is the maximum voltage...
-
The distribution for the test is: A new AIDS prevention drug was tried on a group of 224 HIV positive patients. Forty-five patients developed AIDS after four years. In a control group of 224 HIV...
-
Under U.S. GAAP, a company may capitalize any interest costs associated with borrowings used in the self-construction of a business asset. Any capitalized interest is added to the cost basis of the...
-
Financial statement information about four different companies is as follows. Instructions (a) Determine the missing amounts. (b) Prepare the owner?s equity statement for Ramirez Company. (c) Write a...
-
In October of 2021, Marielle bought 1700 shares of Yakamura Trading Co. on the Tokyo Stock Exchange at a price of 1330 per share. The exchange rate at the time was 80.96 per C$. She sold the stock...
-
You are interested in opening a new bakery in town. You are considering locations, and combinations of inputs to determine whether you should open, if you would be successful, and where you should...
-
The useful output from a heat engine is 240 cal. The energy that is wasted is 5,611 J. What is the Carnot efficiency of the engine? (Answer with units of %. i.e. 30 not 0.3. you do not need to...
-
what are the benefits that TD Bank's employees can receive by partnering with Compassion charity? and explain how TD Bank's employees can get involved in Compassion's work and how they can benefit...
-
You work as assistant to the Chief Financial Officer (CFO) of Delicious Candies (the Company), which produces a range of sweets in the United Kingdom (UK) and exports them to continental Europe...
-
you manage a bond portfolio worth 400 million. you wish to hegdge your portfolio against rise in interest rates by
-
Cullumber Inc. operates a lumber yard. Cullumber purchases the raw materials for $53300 and incurs additional processing costs of $39500 to obtain three observable joint products. Further processing...
-
What are the challenges and benefits of implementing a telecommuting policy from an organizational behavior perspective? Explain
-
Find the LCD. 5 X X 4' 3x+5 4x-8
-
Pearl Medavoy will invest $10,240 a year for 20 years in a fund that will earn 10% annual interest. . If the first payment into the fund occurs today, what amount will be in the fund in 20 years? If...
-
Joes sister, Flo Grow, is a university administrator. She uses an alternative method of gardening. Flo has found that happy plants only need fertilizer and talk. Where f is the number of bags of...
-
Schrecklich and LaMerde are two justifiably obscure nineteenth century impressionist painters. The worlds total stock of paintings by Schrecklich is 100, and the worlds stock of paintings by LaMerde...
-
This problem is set in a fanciful location, but it deals with a very practical issue that concerns residents of this earth. The question is, In a Democracy, when can we expect that a majority of...
-
What would be the characteristics of a cumulative redeemable participating convertible preference share?
-
Explain the concept of limited liability.
-
Describe the global growth of stock markets.
Study smarter with the SolutionInn App