<u>Find the slope of the perpendicular line</u>
When two lines are perpendicular, the product of their slopes is -1. This means that the slopes are negative-reciprocals of each other.
⇒ if the slope of this line = 2 (y = 2x + 2)
then the slope of the perpendicular line (m) = - ¹/₂
<u>Determine the equation</u>
We can now use the point-slope form (y - y₁) = m(x - x₁)) to write the equation for this line:
⇒ y - 3 = - ¹/₂ (x - 4)
We can also write the equation in the slope-intercept form by making y the subject of the equation and expanding the bracket to simplify:
since y - 3 = - ¹/₂ (x - 4)
y = - ¹/₂ x + 5 (in slope-intercept form)
Note that
Answer:
Mary's risk premium is $0.9375
Step-by-step explanation:
Mary's utility function,
Mary's initial wealth = $100
The gamble has a 50% probability of raising her wealth to $115 and a 50% probability of lowering it to $77
Expected wealth of Mary,
= (0.5 * $115) + (0.5 * $77)
= 57.5 + 38.5
= $96
The expected value of Mary's wealth is $96
Calculate the expected utility (EU) of Mary:-
The expected utility of Mary is $9.75
Mary will be willing to pay an amount P as risk premium to avoid taking the risk, where
U(EW - P) is equal to Mary's expected utility from the risky gamble.
U(EW - P) = EU
U(94 - P) = 9.63
Square root (94 - P) = 9.63
If Mary's risk premium is P, the expected utility will be given by the formula:
Mary's risk premium is $0.9375