Consider insurance that is actuarially fair, meaning that the premium is equal to expected claims: Premium = p A where p is the expected probability of a claim, and A is the amount that the insurance company with pay in the event of an accident. An agent has a level of wealth w 0 p = 0.3 the agent will suffer a loss with the amount, L = 4000. How much insurance will a risk averse agent buy? (A =?) = 10000. There is a probability of

Consider insurance that is actuarially fair, meaning that the premium is equal to expected claims: Premium = p A where p is the expected probability of a claim, and A is the amount that the insurance company with pay in the event of an accident. An agent has a level of wealth w 0 p = 0.3 the agent will suffer a loss with the amount, L = 4000. How much insurance will a risk averse agent buy? (A =?) = 10000. There is a probability of

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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An investor has a power utility function with a coefficient of relative risk aversion of 3. Compare the utility that the investor would receive from a certain income of £2 with that generated by a lottery having equally likely outcomes of £1 and £3. Calculate the certain level of income which, for an investor with preferences as above, would generate identical expected utility to the lottery described. How much of the original certain income of £2 the investor would be willing to pay to avoid the lottery? Detail the calculations and carefully explain your answer.
Suppose that a person's utility function is the square root of wealth. Suppose the person earns $100,000 per year. He or she has an illness with a probability of 0.2, and the cost of the treatment is $30,000. Would the person pay $6,000 for insurance? Why or why not? What is the most this person would pay to be insured (hint: equate expected utility to utility with certainty)? Suppose their utility function changed to wealth squared (hint: are they now risk averse?). Would they pay $6,000 for insurance? Why or why not?
Question 15 W(1-x) Selwyn has a utility function of the formu (W) = - -, where x=0.3. Calculate Selwyn's coefficient of relative 1-x risk aversion when his wealth is equal to £12. Round your answer to 1 decimal place. Add your answer
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Suppose that there is asymmetric information in the market for used cars. Sellers know the quality of the car that they are selling, but buyers do not. Buyers know that there is a 30% chance of getting a "lemon", a low quality used car. A high quality used car is worth $30,000, and a low quality used car is worth $15.000. Based on this probability, the most that a buyer would be willing to pay for a used car is S. (Enter your response rounded to the nearest dollar.)
Q13
Joey has utility function 1+√x where x is the amount of money he has. He is... A) Cannot tell from the information provided B) Risk averse C) Risk Netutral D) Risk Loving
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Explain why the variance of an investment is a useful measure of the risk associated with it
Suppose an individual earns income $600 when they are sick, and $1000 when they are healthy. Suppose this individual is sick with probability p = 0.5 and has a utility function over income, I, of U(I) = ln(I). Is this individual risk-averse, risk neutral or risk-loving? Suppose she is able to purchase insurance at any amount from at an actuarially fair price. Fully describe the amount she would purchase (payout, premium and final outcomes). Verify that she is better off with the contract in part b, as opposed to being uninsured. Suppose insurance company A offers a payout q = $400 (when she is sick) at a premium of r = $220 and insurance company B offers a payout of $200 at a premium of $100. Company A's contract is: Actuarially fair or unfair? Is it full or partial insurance? Company B's contract is: Actuarially fair or unfair? Is it full or partial insurance? Which contract does this individual prefer? Suppose contract A is unfair, but offers full coverage at price . Contract B…
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