PPD Problem Set

1. Should Governments mandate that individuals purchase health insurance and make contributions for 401(k) retirement accounts? Why or Why not?

Note: You may want to read the freakonomics post (see: http://freakonomics.com/2012/12/07/americans-inconsistent-on-financial-risk/) and American Economic Review Paper citied

2. Did the Risk of Divorce drive boomer women to increase their education? Do men face the same risk? Why or Why not? Note: You may want to read the freakonomics post (see: http://freakonomics.com/2011/10/18/did-risk-of-divorce-drive-boomer-women-toincrease-their-education/) and the working paper cited.

3. Is the shortage of women in high-level corporate positions a reflection of the fact that women are generally more risk averse then men? If so, what public policies could address this concern? Note: You may want to read the freakonomics post (see: http://freakonomics.com/2012/03/02/can-single-sex-education-make-women-less-riskaverse/)

4. Are you more likely to be killed by a Shark or a Vending Machine? Find 5 of your peers and gather their responses to this question. Next, find the true facts at: http://freakonomics.com/2011/09/08/how-are-sharks-less-dangerous-than-vendingmachines-an-exercise-in-conditional-risk/.

What policies would you recommend to reduce these 'deadly' risks?

5. Draw a utility function (with income on the horizontal axis) for an individual who is risk-loving at low levels of income, risk-neutral at moderate levels of income, and risk-averse at high levels of income (with each of these three regions clearly labeled). How would someone who looked at this graph (and had no other information about the individual) be able to figure out the individual's attitude toward risk (averse/loving/neutral) in each region?

6. You are in charge of the environmental policy division of a local non-profit. Suppose that you are only allowed to apply for a special cleanup grant once, and you have just been awarded a grant worth $160,000. You are given the choice to take this money now or wait until next year, and see how much money is available next year. Since next year new government officials may be in place, you may want to wait to see if there is more money. Assume that $1 today is equivalent to $1 next year. There are three possible outcomes:

Should you accept the money today or wait until next year? In your answer, make sure to mention the expected value of the money to be awarded, the expected utility, and the certainty equivalent of the amble. Assume that U(X) = √X, where X is money in dollars.

7. Your uncle recently suffered a serious injury in a single-vehicle automobile accident, and has filed a lawsuit against the manufacturer, claiming that the accident occurred because the car's brakes did not work correctly. Past experience with similar cases suggests that there is a 50% chance that he will lose the lawsuit and receive no compensation, a 40% chance that he will win and receive $625,000, and a 10% chance that he will win and receive $900,000. Your uncle's utility function is U(X) = √X, where X is the amount of compensation received in thousands of dollars (so, for example, X = 5 would correspond to compensation of $5,000).

a. What is the expected value of the compensation received by your uncle? What is his expected utility?

b. If the car's manufacturer offers your uncle $225,000 to settle the lawsuit out of court (i.e., in place of any compensation he might have received from the lawsuit), should he accept this offer? What does this indicate about your uncle's attitude toward risk (i.e., whether he is risk-neutral, risk-averse, or risk-loving)?

c. What is the minimum amount of money that your uncle would be willing to accept in order to settle the lawsuit out of court? Explain how this relates to the concepts of the certainty equivalent and the risk premium.

Attachment:- Assignment.rar