ECO204Y5 Study Guide - Quiz Guide: Isocost, Substitute Good, Isoquant
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Eco204: solutions to quiz #2: vronsky owns a thoroughbred horse named frou-frou, who is running in the next horserace. Vronsky, whose utility function is u(w) where w stands for his wealth, has placed a bet that. There is risk involved in this bet: if frou-frou loses the race, Vronsky will lose the money he placed on the bet. But if she wins the race, he will receive a large amount of money for winning the bet. True, false, or uncertain: to ensure his utility is equal to his expected utility, vronsky is willing to pay a positive amount of money. The statement is uncertain: it depends on vronsky"s risk preference. If vronsky is risk averse, the statement is true. Without paying the risk premium, e(u) < u, so he is willing to pay a positive amount of money to avoid risk and ensure e(u) = u. Essentially, he is giving up money to avoid the disutility of risk.
