A risk-neutral individual has the utility function u(w) = aw, where w is her wealth, and a>0 a parameter.Her initial wealth is equal to W. There might be a fire which would destroy the dollar amount L of thiswealth. The fire occurs with probability p. The individual can buy insurance to cover the amount K, withKE[0,L]. The insurance premium is given by g, so that if she buys insurance to cover an amount K, shemust pay the insurance company the amount gK.Solve the expected utility maximization problem of this individual to determine how much insurance shewould buy. From the first-order condition you obtain, determine how much insurance she will buy in eachof the following cases:a) The insurance market is competitive.b) The insurance market is characterized by imperfect competition, so that insurance companies havemarket power.c) The insurance market is competitive, but the government subsidizes insurance companies, so that whena firm sells insurance for a coverage of K, it receives from the government the amount sK.

Answered: Image /qna-images/answer/cfee8c0b-0278-4b2f-9c43-9f1301b2aea2.jpg

Answered: A risk-neutral individual has the…

MATLAB: An Introduction with Applications

6th Edition

ISBN:9781119256830

Author:Amos Gilat

Publisher:Amos Gilat

Chapter1: Starting With Matlab

Section: Chapter Questions

Problem 1P

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If P(Z>a)=0.6996 and P(Zb or Za) %3D O a. 0.3537 O b. 0.4471 O c. 0.8463 O d. 0.1537
if P(E and F)= 0.04 P(E|F)= 0.16 P(F|E)= 0.2 then P(E) is
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