particularly active this season involves betting on the winner of the U.S. presidential election. Thus, for example, if one trader buys one share of "Obama to win" from another trader, then if Obama wins the election the seller pays 1 dollar to the buyer, and if Obama does not win the seller pays nothing; either way, the seller keeps the money paid by the buyer for the purchase of the share. (a) Leila is an expected utility maximizer with von Neumann-Morgenstern utility u(x) = In(x + 1) and initial wealth 4. Leila believes that Obama will win with probability 1/2. Find the highest price p, at which she is willing to buy at least one share. Solution: The price pa solves
particularly active this season involves betting on the winner of the U.S. presidential election. Thus, for example, if one trader buys one share of "Obama to win" from another trader, then if Obama wins the election the seller pays 1 dollar to the buyer, and if Obama does not win the seller pays nothing; either way, the seller keeps the money paid by the buyer for the purchase of the share. (a) Leila is an expected utility maximizer with von Neumann-Morgenstern utility u(x) = In(x + 1) and initial wealth 4. Leila believes that Obama will win with probability 1/2. Find the highest price p, at which she is willing to buy at least one share. Solution: The price pa solves
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.3P
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Question
please only do: if you can teach explain steps
How does pb compare to the lowest price ps at which Leila is willing to sell at least one
share? Are they same? Explain.
Solution: Since Leila is risk averse, she will only agree to buy or sell if doing so yields
a positive expected value. Therefore, we must have
how to solve for this: ps > 1/2 > pb (and in particular,
ps > pb).
b) c
how to solve for this:
for Vadim is 4, and therefore p0
b < pb.
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Step 1: Define utility function with context to the given information
VIEWStep 2: A) Compute the highest possible price that Person L is willing to pay for the share
VIEWStep 3: B) Assess the willingness to buy and sell
VIEWStep 4: C) Interpret the effect on share, when Person V is more risk-averse
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