A household has initial wealth of $102,400. Out of this, $24,000 is in the form of valuables that could potentially be stolen, and the probability of a burglary in which they are stolen is 0.10. The household's utility from their final level of wealth, W, is v(W) = vW. %3D a) If an insurance company offers a policy that pays out $24,000 if the valuables are stolen but costs $2,400 in premiums, should the household purchase it (assuming the household wants to maximize expected utility)? b) Explain in words why a policy that costs a little more than $2,400 might be mutually beneficial to both the household and a (risk neutral) insurance company.

A household has initial wealth of $102,400. Out of this, $24,000 is in the form of valuables that could potentially be stolen, and the probability of a burglary in which they are stolen is 0.10. The household's utility from their final level of wealth, W, is v(W) = vW. %3D a) If an insurance company offers a policy that pays out $24,000 if the valuables are stolen but costs $2,400 in premiums, should the household purchase it (assuming the household wants to maximize expected utility)? b) Explain in words why a policy that costs a little more than $2,400 might be mutually beneficial to both the household and a (risk neutral) insurance company.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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