A house owner plans to buy a fire insurance for his house worth $100000, suppose there is 10% chance of house catching fire which will cause him damages worth $40000. Find the amount which the person is willing to pay over and above acturially fair price of the fire insurance if his utility function is U= W0.5 (where W = wealth) ? 500 4460 460 4000

A house owner plans to buy a fire insurance for his house worth $100000, suppose there is 10% chance of house catching fire which will cause him damages worth $40000. Find the amount which the person is willing to pay over and above acturially fair price of the fire insurance if his utility function is U= W0.5 (where W = wealth) ? 500 4460 460 4000

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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# 4 Consider an individual with a utility function of the form u(w) = √w. The individual has an initial wealth of $4. He has two investments options available to him. He can eitffer keep his wealth in an interest-free account or he can take part in a particularly generous lottery that provides $12 with probability of 1/2 and $0 with probability 1/2. Assume that this person does not have to incur a cost if he decides to take part in the lottery. (a) Will this individual participate in the lottery? (b) Calculate this individual's certainty equivalent associated with the lottery. What is his risk premium?
Billy's income Is equal to / = 100 and his utility function is U = [?. There is a 10% chance that he will be in an accident next year with his skateboard that will cause $70 worth of damage. Get the risk premium for Billy. b. An Insurance company offers a policy that will cover all the damages if an accident occurs Calculate the fair price for the insurance. %3D a.
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Sadija has a concave utility function of U(W) = In(W). She has inherited a ring from a relative, but she is unsure about its value. She believes that it is worth £6,000 with a probability of 1/3 and £3,000 with a probability of 2/3. a. Ahmed would like to buy the ring from her. Which price would he need to offer for Sadija' utility to remain unchanged after the sale? b. In fact, Ahmed offers £4,000 for the ring. What can you infer about Ahmed?
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Suppose your preferences can characterized by the simple utility function U = √C, where C is consumption. You enjoy rock climbing, where you have a 10% chance of get- ting injured and losing $50,000. Your income (and therefore consumption) in the uninjured state is $90,000. What is the most you are willing to pay for an insurance policy? What is the fee for a fair insurance?
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