Consider two individuals, Dave and Eva. Both Dave and Eva have initial wealth 810, 000 and face a 40% chance of losing L= 450,000. Dave has von Neumann-Morgenstern utility function up(x) = x and Eva has von Neumann-Morgenstern utility function u(x) = √√√x. 1. What do you know about Dave's and Eva's risk preferences? 2. What is the most Dave would be willing to pay for complete insurance against the loss? 3. What is the most Eva would be willing to pay for complete insurance against the loss?
Consider two individuals, Dave and Eva. Both Dave and Eva have initial wealth 810, 000 and face a 40% chance of losing L= 450,000. Dave has von Neumann-Morgenstern utility function up(x) = x and Eva has von Neumann-Morgenstern utility function u(x) = √√√x. 1. What do you know about Dave's and Eva's risk preferences? 2. What is the most Dave would be willing to pay for complete insurance against the loss? 3. What is the most Eva would be willing to pay for complete insurance against the loss?
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter19: The Basic Tools Of Finance
Section19.2: Managing Risk
Problem 2QQ
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