I need 4,5,6 answered Exercise 4: InsuranceFiona has von Neumann-Morgenstern utility function u(x) = VT and initial wealth 640, 000. She faces a25% chance of losing L = 280, 000.1. Is Fiona risk averse?2. What is Fiona's utility if no loss occurs, what is her utility if the loss occurs? What is Fiona's expectedutility?3. What is the cost of fair insurance against the possible loss?Suppose Fiona is able to choose insurance with any coverage z E [0, 1] (i.e. 0 < z < 1). If she buys insurancecoverage at level z, she will get reimbursed z· 280, 000 if the loss occurs. Insurance coverage at level z costsCo + z· C1ifz > 0C(2) =ifz = 04. Suppose co0 and ci =70, 000. Is insurance at coverage level z > 0 fair insurance? What coveragelevel z* would Fiona choose? Explain.5. Suppose co =100 and c170, 000. Is insurance at coverage level z > 0 fair insurance? What coveragelevel z** would Fiona choose? Explain. (Note that co100 is an "avoidable fixed cost" which is onlypaid if she chooses strictly positive insurance coverage. However, the "marginal cost" of additionalinsurance, c1 = 70,000, is the same as in the previous part.)6. Suppose co =100 and ci =72, 000. Is full insurance, that is, coverage level z =1 optimal? Explain.

4. Suppose co = 0 and c1 = 70, 000. Is insurance at coverage level z > 0 fair insurance? What coverage level z* would Fiona choose? Explain. 5. Suppose co = 100 and ci = 70,000. Is insurance at coverage level z > 0 fair insurance? What coverage level z** would Fiona choose? Explain. (Note that co = 100 is an "avoidable fixed cost" which is only paid if she chooses strictly positive insurance coverage. However, the "marginal cost" of additional insurance, c1 = 70, 000, is the same as in the previous part.) 6. Suppose co = 100 and cı = 72,000. Is full insurance, that is, coverage level z =1 optimal? Explain.

4. Suppose co = 0 and c1 = 70, 000. Is insurance at coverage level z > 0 fair insurance? What coverage level z* would Fiona choose? Explain. 5. Suppose co = 100 and ci = 70,000. Is insurance at coverage level z > 0 fair insurance? What coverage level z** would Fiona choose? Explain. (Note that co = 100 is an "avoidable fixed cost" which is only paid if she chooses strictly positive insurance coverage. However, the "marginal cost" of additional insurance, c1 = 70, 000, is the same as in the previous part.) 6. Suppose co = 100 and cı = 72,000. Is full insurance, that is, coverage level z =1 optimal? Explain.

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter19: The Basic Tools Of Finance

Section: Chapter Questions

Problem 9PA

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Exercise 4: Insurance Fiona has von Neumann-Morgenstern utility function u(x) = VT and initial wealth 640, 000. She faces a 25% chance of losing L = 280, 000. 1. Is Fiona risk averse? 2. What is Fiona's utility if no loss occurs, what is her utility if the loss occurs? What is Fiona's expected utility? 3. What is the cost of fair insurance against the possible loss? Suppose Fiona is able to choose insurance with any coverage z E [0, 1] (i.e. 0 0 C(z) = if z = 0 4. Suppose co = 0 and c1 = 70,000. Is insurance at coverage level z > 0 fair insurance? What coverage level z* would Fiona choose? Explain. 5. Suppose co = 100 and c1 = 70,000. Is insurance at coverage level z > 0 fair insurance? What coverage level z** would Fiona choose? Explain. (Note that co = 100 is an "avoidable fixed cost" which is only paid if she chooses strictly positive insurance coverage. However, the "marginal cost" of additional insurance, c1 = 70,000, is the same as in the previous part.) 6. Suppose co = 100 and…
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1. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,00 A. Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. B. What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?
Exercise 7: Insurance Consider two individuals, Dave and Eva. Both Dave and Eva have initial wealth 810, 000 and face a 40% chance of losing L = 450,000. Dave has von Neumann-Morgenstern utility function up(x) = x and Eva has von Neumann-Morgenstern utility function uê(x) = √x. 1. What do you know about Dave's and Eva's risk preferences? 2. What is the most Dave would be willing to pay for complete insurance against the loss? 3. What is the most Eva would be willing to pay for complete insurance against the loss?
5. Larry, who has wealth (w) of 100, faces a 25% probability that a catastrophe will eliminate all of his wealth. Larry's utility function is u(w) = In (w + 1). We will cover insurance on 12/2 in case you want to hold off on parts (b) and (d) until then. Characterize Larry's preference over risk. Is he risk-averse, risk-loving, or risk-neutral? а. Explain. b. What is the highest premium that Larry would accept for full insurance? C. Alternatively, suppose that Larry's utility is u (w) = e". Characterize his preference for risk and explain your answer. d. Under this alternative utility function, what is the highest premium that Larry would accept for full insurance? Explain.
In the summer of 1984, Nicholai opened a small art gallery in the West Village and amassed a collection worth $2,60,000. An insurance company figured there was a 5% chance the collection would be destroyed and worth $0. Nicholai has utility u(x) = x0.5. If Nicholai purchases full insurance at a fair price, his expected utility would be ___. while if he declines the insurance he would face an expected utility of а. 1,487.5; 1,531.8 b. 1,487.5; 1,444.9 с. 1,571.6;B 1,531.8 d. 1,571.6; 1,444.9
Lucy, the manager of the medical test firm Dubrow Labs, worries about the firm being sued for botched results from blood tests. If it isn't sued, the firm expects to earn profit of $120, but if it is successfully sued, its profit will be only $20. Lucy believes that the probability of a successful suit is 20%. If fair insurance is available and Lucy is risk averse, how much insurance will she buy? Lucy will buy insurance that costs her $ when not successfully sued. (Enter your response as a whole number.)
Exercise 5: Insurance Consider two individuals, Dave and Eva. Both Dave and Eva have initial wealth 810, 000 and face a 40% chance of losing L = 450, 000. Dave has von Neumann-Morgenstern utility function up(x) = r and Eva has von Neumann-Morgenstern utility function uf(x) = VT. 1. What do you know about Dave's and Eva's risk preferences? 2. What is the most Dave would be willing to pay for complete insurance against the loss? 3. What is the most Eva would be willing to pay for complete insurance against the loss? Suppose they are each able to choose insurance with any coverage level z E [0, 1] (i.e. 0 0. 6. Is Eva's optimal choice full insurance, i.e. z = 1?
Exercise 5: Insurance Consider two individuals, Dave and Eva. Both Dave and Eva have initial wealth 810,000 and face a 40% chance of losing L = 450, 000. Dave has von Neumann-Morgenstern utility function up(x) = x and Eva has von Neumann-Morgenstern utility function ug (x) = VT. 1. What do you know about Dave's and Eva's risk preferences? 2. What is the most Dave would be willing to pay for complete insurance against the loss? 3. What is the most Eva would be willing to pay for complete insurance against the loss? Suppose they are each able choose insurance with any coverage level z [0, 1] (i.e. 0 0. 6. Is Eva's optimal choice full insurance, i.e. z = 1?
4) Luke is planning an around-the-world trip on which he plans to spend $10,000. The utility from the trip is a function of how much she spends on it (Y ), given by U(Y) = InY a). If there is a 25 percent probability that Luke will lose $1000 of his cash on the trip, what is the trip's expected utility. b). Suppose that Luke can buy insurance to fully against losing the $1,000 with a actuarially fair insurance. What is his expected utility if he purchase this insurance. Will he purchase the insurance? c). Now suppose utility function is U(Y) = Y/1000 What is his expected utility if he purchase the insurance in b). Will he purchase the insurance?
Michael lives on an island and owns a beach house worth $400,000. Of that, $100,000 is the cost of land and $300,000 is the cost of the structure. The probability that a hurricane destroys his house is 3percent (he will still own the land). Michael can purchase hurricane insurance at the price of $2for each $100 of coverage. 1. What is Michael’s contingent consumption bundle if Michael does not purchase insurance
Suppose that there is a 20% chance Malik is injured and earns $100,000, and an 80% chance he stays healthy and will earn $500,000. Suppose further that his utility function is the following (utility = square root of income) Malik is risk ____. He will prefer ____ (given the same expected income). a. lover; actuarially fair and full insurance to no insurance b. averse; no insurance to actuarially fair and full insurance c. neutral; he will be indifferent between actuarially fair and full insurance to no insurance d. lover; no insurance to actuarially fair and full insurance e. averse; actuarially fair and full insurance to no insurance