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:

Right to Vote

The entitlement of citizens in a democracy to participate in elections to choose their representatives, considered a fundamental political right.

Treaty of Guadalupe Hidalgo

The 1848 agreement that ended the Mexican-American War and resulted in the U.S. acquiring territories from Mexico, including parts of present-day Arizona, California, Colorado, Nevada, New Mexico, Utah, and Wyoming.

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A 19th-century belief that the expansion of the U.S. across the American continents was both justified and inevitable.

Johann Blumenbach

A German physician, naturalist, physiologist, and anthropologist known for his influential work in the classification of human races.