Willy's Only Source of Wealth Is His Chocolate Factory

question 10

Multiple Choice

Willy's only source of wealth is his chocolate factory.He has the utility function pc^1/2_f + (1 - p) c^1/2_nf, where p is the probability of a flood, 1 - p is the probability of no flood, and c_f and c_nf are his wealth contingent on a flood and on no flood, respectively.The probability of a flood is p = 1/13.The value of Willy's factory is $500,000 if there is no flood and 0 if there is a flood.Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company $3x/15 whether there is a flood or not, but he gets back $x from the company if there is a flood.Willy should buy

• A)no insurance since the cost per dollar of insurance exceeds the probability of a flood.
• B)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/9 of what it would be if there is no flood.
• C)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be the same whether there is a flood or not.
• D)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/4 of what it would be if there is no flood.
• E)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/7 of what it would be if there is no flood.

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Definitions:

Prenatal Nutrition

The dietary intake and nutritional status of a mother during pregnancy, which is crucial for the health and development of the fetus.

Myelination

The process by which a myelin sheath is formed around nerves, thus enhancing the rate at which signals travel along the myelinated fibers.

Second Growth Spurt

The phase of accelerated growth typically occurring during adolescence, following the initial growth spurt in early childhood.

Prenatal Development

The process of growth and development within the womb from conception to birth.