Willy's Only Source of Wealth Is His Chocolate Factory

question 30

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 = 1/4.The value of Willy's factory is $300,000 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 $5x/18 whether there is a flood or not but he gets back $x from the company if there is a flood.Willy should buy

• A)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/25 of what it would be if there were no flood.
• B)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be the same whether there was a flood or not.
• C)no insurance since the cost per dollar of insurance exceeds the probability of a flood.
• D)enough insurance so that if there is a flood, after he collects his insurance, his wealth will be 1/6 of what it would be if there were no flood.
• E)enough insurance so that if there is a flood, after he collects his insurance his wealth will be 1/11 of what it would be if there were no flood.

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Definitions:

Psychoanalyst

A therapist who practices psychoanalysis, a method of psychological therapy originated by Sigmund Freud that explores the influence of the unconscious mind on behavior.

Weak Ego

Refers to an individual's fragile sense of self that has difficulty maintaining personal boundaries or coping with stressors.

Reality Principle

In psychoanalytic theory, the ability of the mind to assess the external world and act upon it accordingly, often in contrast with the pleasure principle.

Id

According to Freudian psychoanalytic theory, it is the part of the mind that contains instinctual desires and operates based on the pleasure principle.