Exercise 4: Option Price Calculation Imagine that we want to value a cultural festival from the point of view of a risk-averse person

Subject:EconomicsPrice:3.86 Bought11

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Exercise 4: Option Price Calculation

Imagine that we want to value a cultural festival from the point of view of a risk-averse person. The person's utility is given by U(I) where $I is her income. She has a 50% chance of being able to get vacation time to attend the festival. If she gets the vacation time, then she would derive a surplus of $X when she attends the festival. (The festival is free and does not cost her anything to attend.) If she does not get vacation time, then she cannot attend the festival.

(a) What is her expected surplus from the cultural festival?

(b) What would be an expression for her expected utility if she does not go to the festival.

(c) Show an expression that determines her option price.