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? ---

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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