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:

Solving New Problems

The process of identifying solutions or answers when encountering unfamiliar situations or challenges.

Consciousness

Our awareness of ourselves and our environment.

Cognition

All the mental activities associated with thinking, knowing, remembering, and communicating.

Psychology

The scientific study of the mind and behavior, encompassing various aspects of conscious and unconscious experience.