Exercises for Ch.

5(Choice under uncertaninty)

1. Jisoo suggested Meesun a chance to participate in the lottery. This

lottery is said to give a prize of 4,000,000 won with a probability
of 20%, 1,000,000won with a probability of 40%, and 0 won with a
probability of 40%. Meesun’s utility function is   
.
(a) Calculate the expected value of this lottery.
(b) Find the her attitude toward risk.
(c) Calculate the expected utility and certainty equivalent.
(d) Calculate the risk premium.

2. Junkoo bought a new house worth 16 Won next to a river and

ponder weather to insure it. He can take out an insurance with
insurance fee(insurance premium) “P” and insurance
money(coverage) “C”. With 50% probability the house is destroyed
by a “flooding” and then the house worth 4 Won. His utility
function is   
 .  means the commodity-1(state 1) with “no
flooding”,  means the commodity-2(state 2) with “flooding”.
Using the State-Dependent Preference Approach, this conditions is
        . If he buys the insurance, it changes to
              in the initial situations.
(a) Calculate the expected value, expected utility, certainty equivalent,
risk premium and find his attitude toward risk.
(b) What would be the actually fair full insurance policy?
 
(c) If the premium rate(   ) is fair, derive the
   
functional relation between  and .

(d) If the premium rate(   ) is fair, find
  
    that maximize his expected utility and What type of
insurance is purchased to obtain this maximized expected utility?