Assume that you will earn $90,000 next year. The probability of having an accident in a year is 0.05 and your income will be $22,500 in that case. Your utility function is U(C)= C1/2 where C is consumption. a) What is your expected utility at the end of the year without insurance? b) Calculate an actuarially fair insurance premium for the full insurance. c) What would your expected utility be if you purchase a full insurance with actuarially fair premium? Will you buy this insurance, why or why not?

Q: You are pondering whether to buy insurance for your new car. The car is worth $50,000. Apart from…

A: Value of Car= $ 50,000Total wealth = $40,000Probability of car being stolen=  or 0.005Probability of…

Q: Assume W(F)=F². Probability of sun is 2/3 and hurricane, 1/3. Plot the IC that runs through Fs,…

A: Utility function : W (F) = F2Probability of Sun = 2/3Probability of Hurricane = 1/3Fs , Fh  :  (400,…

Q: Suppose that there is a 20% chance Malik is injured and earns $100,000, and an 80% chance he stays…

A: Insurance is a legal agreement between a person and an insurance provider whereby the person agrees…

Q: 1. Suppose a person's utility is equal to U = VY and the initial income is $80,000. Medical expenses…

A: Here we are given the uncertain scenario and consumer's hence consumer's income also depends on this…

Q: Suppose a company offers a standard insurance contract with a premium (r) of $2,000 and a payout (q)…

A: Given that: Premium (r) = $2000Payout (q)= $10000Healthy state Income Ih = $70000Sick state Income…

Q: You have a log utility, U = In(W), where W is your wealth. Currently, you own $1,000. You are given…

A: Utility:The utility is want satisfying power of a commodity. It can be expressed in cardinal and…

Q: 5. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser…

A: Von Neumann-Morgenstern utility function is an extension of consumer utility theory that…

Q: A risk-loving individual has $1000 to invest. The individual maximizes his/her expected utility and…

A: Investment = $1000 If invests in risky assets:  each $1 invested yields $] with probability p $B…

Q: Consider a person with a current wealth of $100,000 who faces the prospect of a 25 percent chance of…

A: This concept of insurance can be explained as a financial arrangement in which a person or entity…

Q: Suppose you visit with a financial adviser, and you are considering investing some of your wealth in…

A: Risk Averse: Someone who avoids taking risks and prioritises safety is said to be risk-averse. They…

Q: A customer has utility function u(x) = log(x + 1000). The customer’s current wealth is $28,000. The…

A: Utility is a concept in economics that measures the satisfaction, happiness, or overall well-being…

Q: Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with…

A: The Von Neumann-Morgenstern (VNM) utility index is an index that measures an individual's preference…

Q: Redo the problem in Question 2 under the assumption that the person can buy flood insurance at a…

A: Contingent consumption refers to the consumption of the buyer when there are uncertain conditions.…

Q: A risk averse individual faces a risk. The individual's utility function is U(W)= In(W) where W is…

A: Fair insurance = probability of loss*loss amount Part a Here the probability of loss is 0.2 and the…

Q: Continue from Question 16: You make $20,000 per year, and there's a $100 insurance expense to…

A: In decision theory, expected utility is a metric that expresses the average level of satisfaction or…

Q: 4. Roman owns a football club. If Roman's club wins the Champions League, he will have wealth M =…

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Q: Q2. Bob's wealth is $2500. However, he faces a 50% chance of suffering a $900 loss. His utility…

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Q: Suppose that you have a job paying $50,000 per year. With a 5% probability, next year your wage will…

A: Given  The income per year =$50,000 There is a 5% chance that the next year the wage is reduced to…

Q: Tess and Lex earn $40,000 per year and all earnings are spent on consumption (c).  Tess and Lex both…

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Q: JOb paying $50,000 per year. injured and unable to work for part of the year reducing your wages to…

A: In economics, utility function is an important concept that measures preferences over a set of goods…

Q: Prospect X = ($4, 0.04 ; $15, 0.05 ; $24, 0.01 ; $38, p) What is the expected value of prospect X?

A: Given prospect Prospect X = ($4, 0.04 ; $15, 0.05 ; $24, 0.01 ; $38, p)

Q: A risk-averse individual experiences an adverse event with probability of 2% (0.02) that costs…

A: Hello. Since your question has multiple parts, we will solve first question for you. If you want…

Q: 2. You are deciding whether or not to purchase insurance. Your income is $100,000 and the chance of…

A: Income = $100,000  Chance of getting sick = 30% Coinsurance rate = 0.15 U = Y0.5  When sick, medical…

Q: You now have constructed a utility function that measures how much you value having total assets…

A: When consumers receive a single unit of goods and services when it meets the consumer satisfaction…

Q: 4) Luke is planning an around-the-world trip on which he plans to spend $10,000. The utility from…

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Q: Consider an individual whose utility function over money is u(w) =1+2wt. (a) Is the individual…

A: Risk Lover:-An individual/investor who is willing to take risks while investing to earn more…

Q: 10. Which one of the following measures may be used to measure the risk of an investment on its own?…

A: Investment is an essential part of creating wealth as well as attain higher economic growth and…