2) Suppose you own a car worth $20,000. You have accident insurance, but your policy does not cover insurance against theft. The insurance company quotes a price of an additional $100 a year to fully insure your car against theft. a) Suppose you are a risk-neutral expected payoff maximiser who has a good estimate of the probability (p e [0,1]) that your car might be stolen next year. At what probability p would you be indifferent between insuring and not insuring your car against theft for a premium of $100 a year? b) How would your answer to part a) change if your preferences were characterised by Prospect Theory rather than Expected Utility Theory? ---
2) Suppose you own a car worth $20,000. You have accident insurance, but your policy does not cover insurance against theft. The insurance company quotes a price of an additional $100 a year to fully insure your car against theft. a) Suppose you are a risk-neutral expected payoff maximiser who has a good estimate of the probability (p e [0,1]) that your car might be stolen next year. At what probability p would you be indifferent between insuring and not insuring your car against theft for a premium of $100 a year? b) How would your answer to part a) change if your preferences were characterised by Prospect Theory rather than Expected Utility Theory? ---
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Pls do both questions
![2) Suppose you own a car worth $20,000. You have accident insurance, but your policy does
not cover insurance against theft. The insurance company quotes a price of an additional
$100 a year to fully insure your car against theft.
a) Suppose you are a risk-neutral expected payoff maximiser who has a good estimate
of the probability (p E [0,1]) that your car might be stolen next year. At what
probability p would you be indifferent between insuring and not insuring your car
against theft for a premium of $100 a year?
b) How would your answer to part a) change if your preferences were characterised by
Prospect Theory rather than Expected Utility Theory?
----](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa4c42f8b-24e9-44c4-b451-1908d7e4455e%2Fbb992764-7433-4837-923b-8bdee408e945%2F3adwzkh_processed.png&w=3840&q=75)
Transcribed Image Text:2) Suppose you own a car worth $20,000. You have accident insurance, but your policy does
not cover insurance against theft. The insurance company quotes a price of an additional
$100 a year to fully insure your car against theft.
a) Suppose you are a risk-neutral expected payoff maximiser who has a good estimate
of the probability (p E [0,1]) that your car might be stolen next year. At what
probability p would you be indifferent between insuring and not insuring your car
against theft for a premium of $100 a year?
b) How would your answer to part a) change if your preferences were characterised by
Prospect Theory rather than Expected Utility Theory?
----
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