App Micro 05

Risk averse is also called ...

• risk loving

• risk seeking

• risk avoiding

• risk neutral

Risk neutrality requires a linear function.

• TRUE

• FALSE

Mr. Miller has a wealth of 1000 Euro. With a probability of 10% he will suer a damage

which decreases his wealth to 500 Euro. He is risk averse. What would be the fair premium to cover complete damage?

• 5 Euro

• 50 Euro

• 500 Euro

• 10%

A prot maximizing insurance company would sell the insurance which covers the damage for a premium of 60 Euro.

• TRUE

• FALSE

What kind of risk behaviour does U'(x) > 0 and U''(x) < 0 indicate?

• Risk avoiding

• Risk seeking

• Risk loving

• Risk taking

The graph shows U(x). Please sketch U'(x).

Assume U(A) is 8 with 10% and U(A) is 20 with 90%. Sketch expected utility of prospect A EU(A).