3. Consider an individual with initial wealth W = $1,000 and utility function over money given by u(w) = w. The individual faces loss of L = $800 with probabil- ity . Suppose an insurance is available at price Sp per unit, where one unit of insurance pays the insured $1 if loss occurs and $0 otherwise. (a) What is the fair price for this insurance, and how much insurance will the individual buy at this price? (b) Suppose p= $0.3. How much insurance will the individual buy? (c) Suppose p = $0.3, but now the individual's utility function over money is u(w) = w?. How much insurance will the individual buy? As clarified in the class, assume that the individual cannot insure more than the amount of loss.

3. Consider an individual with initial wealth W = $1,000 and utility function over money given by u(w) = w. The individual faces loss of L = $800 with probabil- ity . Suppose an insurance is available at price Sp per unit, where one unit of insurance pays the insured $1 if loss occurs and $0 otherwise. (a) What is the fair price for this insurance, and how much insurance will the individual buy at this price? (b) Suppose p= $0.3. How much insurance will the individual buy? (c) Suppose p = $0.3, but now the individual's utility function over money is u(w) = w?. How much insurance will the individual buy? As clarified in the class, assume that the individual cannot insure more than the amount of loss.

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Description: 3. Consider an individual with initial wealth W = $1,000 and utility function overmoney given by u(w) = w}. The individual faces loss of L = $800 with probabil-ity . Suppose an insurance is available at price $p per unit, where one unit ofinsurance

MATLAB: An Introduction with Applications

6th Edition

ISBN:9781119256830

Author:Amos Gilat

Publisher:Amos Gilat

Chapter1: Starting With Matlab

Section: Chapter Questions

Problem 1P

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Question

3. Consider an individual with initial wealth W = $1,000 and utility function over
money given by u(w) = w}. The individual faces loss of L = $800 with probabil-
ity . Suppose an insurance is available at price $p per unit, where one unit of
insurance pays the insured $1 if loss occurs and $0 otherwise.
(a) What is the fair price for this insurance, and how much insurance will the
individual buy at this price?
(b) Suppose p = $0.3. How much insurance will the individual buy?
(c) Suppose p = $0.3, but now the individual's utility function over money is
u(w) = w². How much insurance will the individual buy? As clarified in
the class, assume that the individual cannot insure more than the amount
of loss.

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