Lecture 4

Question 1

How do we denote the expected value of a payoff given different states of the world?

Answer 1

Question 2

What is the St Petersburg Paradox?

Answer 2

Question 3

What is an actuarially fair prospect and how do we define individuals risk preference given this?

Answer 3

Question 4

Write the set up for the budget line for contingent commodities

Answer 4

Question 5

Below is the budget line for contingent commodities. What things can we say about it (5)?

Answer 5

Question 6

What is the actuarially fair budget line?

Answer 6

Question 7

Given the below set up, draw the actuarially fair budget line

Answer 7

Question 8

Describe the 3 different types of risk preference

Answer 8

Question 9

Draw the three different types of risk preference indifference curves

Answer 9

Question 10

If pricing of insurance is actuarially fair (which follows if firms (i) are risk neutral; (ii) incur
no (admin) costs; and (iii) face perfect competition) then given the below set up what will the contingent compaention be?

Answer 10

Question 11

Draw how moving from actuarially unfair to fair will affect consumption under insurance

Answer 11

Question 12

What is the von Neumann Expected Utility Theorem?

Answer 12

Question 13

What does implication does the von Neumann-Morgenstern EUT have for risk preference?

Question 14

Given the below set up, draw the expected utility for a risk averse consumer. What is the conclusion?

Answer 14