Suppose a Real Estate Agent's Utility Function Is Given by U

question 33

Essay

Suppose a real estate agent's utility function is given by U = I^0.5, where I is income. The agent has uncertain income, such that this year she has a 20% chance of earning $62,500 and an 80% chance of earning $160,000. The income level that would offer the same expected utility is $136,900. What is this agent's risk premium?

---

Definitions:

Price and Output Results

The outcomes in terms of price levels and quantity of goods or services produced and sold, often analyzed in context of market conditions or economic policies.

Pure Monopoly Model

An economic model describing a market structure with a single firm dominating the market, without close substitutes for its product, enabling price setting power.

Tacit Understanding

An implicit agreement or understanding that is not formally expressed or written, but is assumed to be shared among the parties involved.

Informal Collusion

A scenario where businesses unofficially agree to certain practices, such as price-setting or market-sharing, without formal agreement, often to reduce competition.