A driver's wealth $100,000 includes a car of $20,000. To install a car alarm costs the driver $1,750. The probability that the car is stolen is 0.2 when the car does not have an alarm and 0.1 when the car does have an alarm. Assume the driver's von Neumann-Morgenstern utility function is U(W) = ln(W). Suppose the driver is deciding between the following three options: (a) purchase no car insurance, do not install car alarm; (b) purchase fair insurance to replace the car, do not install car alarm; and (c) purchase no car insurance, install car alarm. Of these three options, the driver prefers: A. option (a). B. option (b). C. option (c). D. options (a) and (b). E. options (a) and (c). F. options (b) and (c). G. all options equally. H. none of these options.
A driver's wealth $100,000 includes a car of $20,000. To install a car alarm costs the driver $1,750. The probability that the car is stolen is 0.2 when the car does not have an alarm and 0.1 when the car does have an alarm. Assume the driver's von Neumann-Morgenstern utility function is U(W) = ln(W). Suppose the driver is deciding between the following three options: (a) purchase no car insurance, do not install car alarm; (b) purchase fair insurance to replace the car, do not install car alarm; and (c) purchase no car insurance, install car alarm. Of these three options, the driver prefers:
| A. |
option (a). |
|
| B. |
option (b). |
|
| C. |
option (c). |
|
| D. |
options (a) and (b). |
|
| E. |
options (a) and (c). |
|
| F. |
options (b) and (c). |
|
| G. |
all options equally. |
|
| H. |
none of these options. |
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