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:

Capacity Allocation

The process of distributing available production or service capacity among various products, services, or customers.

Supply Chain Performance

An assessment of how well a supply chain meets its goals of efficiency, speed, cost-effectiveness, and customer satisfaction.

Capacity Decisions

Decisions concerning the amount of resources, such as space, equipment, and labor, that an organization allocates to its operations or processes.

Capacity Allocation

The process of distributing resources and production capacity among various products, services, or activities to efficiently meet demand and optimize output.