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There are two possible outcomes, Outcomes A and B. Suppose that Mr Morrison considers whether he should buy an insurance and the insurance premium is
There are two possible outcomes, Outcomes A and B. Suppose that Mr Morrison considers whether he should buy an insurance and the insurance premium is $10.00. Suppose that Mr Morrison's payoffs, exclusive of the insurance premium p, are given as follows: Insurance Payment Gain $20.00 Outcome A $0.00 Outcome B -$6.00 $16.00 For the following questions, suppose that both outcomes are equally likely (meaning that each outcome arises with 50% chance). c. (1 marks) What is Mr Morrison's expected payoff? 1 ,2 d. (4 marks) Suppose that Mr Morrison's utility function is u(w) = 2w w, where 100 w is his monetary outcome. Calculate Mr Morrison's expected utility with and without the insurance. e. (2 marks) Should Mr Morrison buy the insurance? Why or why not? There are two possible outcomes, Outcomes A and B. Suppose that Mr Morrison considers whether he should buy an insurance and the insurance premium is $10.00. Suppose that Mr Morrison's payoffs, exclusive of the insurance premium p, are given as follows: Insurance Payment Gain $20.00 Outcome A $0.00 Outcome B -$6.00 $16.00 For the following questions, suppose that both outcomes are equally likely (meaning that each outcome arises with 50% chance). c. (1 marks) What is Mr Morrison's expected payoff? 1 ,2 d. (4 marks) Suppose that Mr Morrison's utility function is u(w) = 2w w, where 100 w is his monetary outcome. Calculate Mr Morrison's expected utility with and without the insurance. e. (2 marks) Should Mr Morrison buy the insurance? Why or why not
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