4. Consider an insurance problem similar to those we have studied. Suppose that bad-state-no- insurance-wealth = $250,000 and good-state-no-insurance-wealth= $750,000. Ned is an expected utility maximizer whose utility function equals U = (wealth), If Ned faces an actuarially fair per-dollar premium, and if Ned is free to choose any amount of coverage, then calculate Ned's optimal coverage x* if there is a 90% chance that the good state will occur (and thus a 10 % chance of the bad state). Carry all decimals to five decimal places. a) Show your work below and then fill in the blank: x* = b) Show your work below and then fill in the blank: Ned's expected bad-state wealth with optimal coverage $

4. Consider an insurance problem similar to those we have studied. Suppose that bad-state-no- insurance-wealth = $250,000 and good-state-no-insurance-wealth= $750,000. Ned is an expected utility maximizer whose utility function equals U = (wealth), If Ned faces an actuarially fair per-dollar premium, and if Ned is free to choose any amount of coverage, then calculate Ned's optimal coverage x* if there is a 90% chance that the good state will occur (and thus a 10 % chance of the bad state). Carry all decimals to five decimal places. a) Show your work below and then fill in the blank: x* = b) Show your work below and then fill in the blank: Ned's expected bad-state wealth with optimal coverage $

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

4. Consider an insurance problem similar to those we have studied. Suppose that bad-state-no-
insurance-wealth = $250,000 and good-state-no-insurance-wealth= $750,000.
Ned is an expected utility maximizer whose utility function equals U = (wealth)2, If Ned faces an
actuarially fair per-dollar premium, and if Ned is free to choose any amount of coverage, then calculate
Neď's optimal coverage x* if there is a 90% chance that the good state will occur (and thus a 10% chance
of the bad state). Carry all decimals to five decimal places.
a) Show your work below and then fill in the blank: x* =
b) Show your work below and then fill in the blank:
Ned's expected bad-state wealth with optimal coverage = $.

c) Show your work below and then fill in the blank:
Ned's expected good-state wealth with optimal coverage = $.
d) Show your work below and then fill in the blank:
Ned's expected utility with optimal coverage =
e) Show your work below and then fill in the blank:
Ned's expected utility with NO insurance =
f) Show your work below and then fill in the blank:
Ned's certainty-equivalent wealth = $_

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