An expected utility maximiser owns a car worth £60 000 and has a bank account with £20 000. The money in the bank is safe, but there is a 50% probability that the car will be stolen. The utility of wealth for the agent is u(y) = In(y) and they have no other assets. Suppose that another firm provides car insurance in which the agent can buy each unit of indemnity at an actuarially fair rate. What insurace coverage would the consumer choose under the new price? O a. £60 000 O b. £30 000 O c. £20 000 O d. £40 000
An expected utility maximiser owns a car worth £60 000 and has a bank account with £20 000. The money in the bank is safe, but there is a 50% probability that the car will be stolen. The utility of wealth for the agent is u(y) = In(y) and they have no other assets. Suppose that another firm provides car insurance in which the agent can buy each unit of indemnity at an actuarially fair rate. What insurace coverage would the consumer choose under the new price? O a. £60 000 O b. £30 000 O c. £20 000 O d. £40 000
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:An expected utility maximiser owns a car worth £60 000 and has a bank account with £20 000. The money in the bank is safe, but there is a 50%
probability that the car will be stolen. The utility of wealth for the agent is u(y) = In(y) and they have no other assets.
Suppose that another firm provides car insurance in which the agent can buy each unit of indemnity at an
actuarially fair rate.
What insurace coverage would the consumer choose under the new price?
O a. £60 000
O b. £30 000
O c.
£20 000
O d. £40 000
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