1 0.5 I am risk avers and trying to maximize my expected value of c , were c is my fortune. I have XXXXXXXXXXin cash and art to the value of XXXXXXXXXXthat I store i my basement. I live in an area, that sometimes experience big rain?ots that can ?ood my basement. If my basement get ?ooded, my art will be worth XXXXXXXXXXThe likehood that my basement will be ?ooded is 1 percent. a What is my expected utility? b How much insurance should I buy to be fully insured? c What is a fair insurance premium? d What is my utility if I buy full insurance at the fair insurance price? 2 a b c A productionfunction is given by f(x x x ), where a+b+c>1. 1 2 3 a Proof that the function is showing increasing returns to scale. 3 2 Look at the costfunction c(y) =3y +22 a order AC(y), AVC(y) and MC(y) and illustrate the in a ?gure. b What output minimize AC(y)? c which output gives that AC(y)=MC(y) 4 Look at a competetive market with many companies who all have identical costfunctions given by c(y) = 2 0.5y +1 for y >0 and c(0) =0. It seems like we have a demand in the market at D(p) =23-p a Order the suplycurve S (p) for each company i b With n companies in the market, order the whole supplycurveS(p) for the industry. c What is the lowest cost we can have to sell products in this market? d How much will each company produce at this price? e How many companies will exist in this market at this price? 1
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