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A driver faces a 5% probability that his car will be in an accident and will be worth nothing.Consider three drivers with cars that have value $30,000. Abdulla's utility function over the value of his car W is u(W) = ln(1 + W). Bedriya's utility function is u(W) = 100 + 0:5W.
a. What is Abdulla's risk premium? (hint: rst, calculate Abdulla's expected utility. Second, calculate X, Abdulla's certainty equivalent. Third, calculate the expected dollar value of the car without insurance. Fourth, calculate risk premium, the dierence between X and the expected dollar value of the car)
b. What is Bedriya's risk premium?
d. Which of these two people is less likely to take on risk? Which is more likely? How do you know?
Suppose that the velocity of money is not constant but is growing at 1% per year. Real GDP is growing by 5% per year. If the central bank wants to reduce the rate of inflation to 3%, what must be the new rate of money growth? If the real rate if r..
Suppose the Bank of Canada wants to implement a policy that would cause the Canadian dollar to depreciate against the British pound. Which of the following money growth rates will achieve this objective.
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Consider an exchange economy with two goods, 1 and 2, and two consumers, A and B. The consumers are initially endowed with a total of unit of each good, i.e. w1 = w1A + w1B = 1 and w2 = w1B + w2B = 1. Their preferences are represented by UA(x1, x2..
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