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Expected-utility theory tells us that a risk-averse individual would want to be paid a risk premium to induce her to voluntarily accept risk. Or, alternatively, the riskaverse individual would have to be offered odds that were in her favor in order to induce her to gamble. Here, "odds" refer to the probability of loss/gain and/or the magnitude of the loss/gain.
Ms. Lee's utility function is U(Y) = (100 + Y) 0.5, where 100 is her initial income level and Y is additional income gained or lost from a gamble. Ms. Lee can choose not to gamble or to gamble. The gamble involves the roll of a fair dice. If the number is even Ms. Lee wins $100 but if it is odd Ms. Lee loses $100.
(i) Will Ms. Lee choose the gamble?
(ii) In words, briefly describe what would need to change to induce Ms. Lee to take the gamble (hint: focus on the characteristics of the gamble not her preferences).
The government wants to eliminate the inflationary gap by changing expenditures. What policy do you suggest? By how much will unemployment change after you policy has taken effect?
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Suppose that Colorado is considering two alternative methods of funding local road construction, matching grants and block grants. In the case of the matching grant, Colorado will spend $1 for every $1 spent by localities. What is the price of an add..
The purpose of Keynesian fiscal policy to combat demand-deficient unemployment in a recession is to:
Sheila budgets $9 per week for her morning coffee with milk. She likes it only if it is prepared with 4 parts of coffee and 1 part milk.
He conducted an analysis and noticed that he incurred implicit cost of exactly $200,000 and explicit costs of $4,800,000 what were his total accounting profits?
Which of the following boosted the ability of small companies selling traditional products to compete in the global market place?
Assuming that your interest rate, i, is equal to 14% annually, what would be your maximum offer (purchase price) on this machine?
The kingdom of Arendelle has equal numbers of two types of workers, domestic servants and ice sellers, which both earn $1,000 per week. All workers face a risk of being laid off next year due to bad market conditions, in which case they will have an ..
Bayer is selling aspirin in both North America and Europe. The elasticity of demand in Europe is -1.5, but -1.4 in North America. It costs Bayer $2 to make a bottle of aspirin. Bayer sells 20 million bottles of aspirin quarterly in Europe, and 15 mil..
The tax still needs to be approved by both houses of Congress and the process is enacted in the next period (t+1).If the only goal of the income tax is to maximize revenue, say, Revenue t = τYt. What can we say about economies A and B at time t (i..
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