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.

---

Definitions:

Business Statistics

The application of statistical methods and techniques to business data for the purpose of making informed decisions.

Moving Average

An analytical technique that examines trends by calculating averages from various segments of the entire data set.

Biodiesel Sales

The volume or number of transactions of biodiesel, a renewable and biodegradable fuel produced from vegetable oils or animal fats, sold within a specific period.

Monuments

Monuments are structures that are erected to commemorate a famous person or event or which serve as a historic marker.