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

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Suppose Investor A has a power utility function with γ = 1, whilst Investor B has a power utility function with γ = 0.5 (i) Which investor is more risk-averse(assuming that w > 0)? (ii) Suppose that Investor B has an initial wealth of 100 and is offered the opportunity to buy Investment X for 100, which offers an equal chance of a payout of 110 or 92. Will she choose to buy Investment X?
A widely used utility function in the economics literature is the constant rate of risk aversion utility function. It is given by: u(c) = c*(1-n) (1-n) Assume that an agent lives for three periods (t-0,1,2) and discounts future utility at rate B (per period). The agent is born with asset level a, and his/her labour market income is yo and y, for periods O and 1 respectively, the agent retire in the last period (no labour income). The interest rate in this economy is r. Please answer the following questions based on the information displayed here. Choose the best option available. Select one: O a. The budget constrain in period t=2 is given by:C2+ ay az(1+r) O b. The budget constrain in period t=2 is given by: Cam a2(1+r) O C. The budget constrain in period t=2 is given by: u(c2)+ a a;(1+r) +ys O d. The budget constrain in period t=2 is given by: C2= az(1+r) +ya O e. The budget constrain in period t#2 is given by: C2+a a(1+r) +ya
For constants a and b, 0 < b, b 1, and expected profit E(p), the expected utility function of a person who is risk-neutral can be written as E(U) = Which one: a+b^p a + (E(p))^b. a - bE(p). a + bE(p). a + (E(p))^(-b).
2
You now have constructed a utility function that measures how much you value having total assets worth x dollars (x ≥ 0). This utility function is U(X)=√x. Compare the utility of reducing your total assets next year by the cost of the earthquake insurance with the expected utility next year of not taking the earthquake insurance. Should you take the insurance?
4) Luke is planning an around-the-world trip on which he plans to spend $10,000. The utility from the trip is a function of how much she spends on it (Y ), given by U(Y) = InY a). If there is a 25 percent probability that Luke will lose $1000 of his cash on the trip, what is the trip's expected utility. b). Suppose that Luke can buy insurance to fully against losing the $1,000 with a actuarially fair insurance. What is his expected utility if he purchase this insurance. Will he purchase the insurance? c). Now suppose utility function is U(Y) = Y/1000 What is his expected utility if he purchase the insurance in b). Will he purchase the insurance?
19. An individual has initial wealth Wo = 3 and has the opportunity to invest some quantity of money x in an extremely risky corporate bond. With probability p= 1/4, the bond will be worth 10x at maturity. With probability 1 – p, it will be worth zero. The individual's utility function over final wealth is u(W) = W0.5. What is the level of investment x that maximizes expected utility? (а) 0 (b) 1 (c) 4/3 (d) V3 (e) 2
Find the Pratt - Arrow risk - aversion function for a utility function U(W) = log(0.5-W + 500), where W is the amount of wealth in €. Suppose that an investor's wealth is subject to outcomes -800 €, 500 €, 500 € and 1, 000 € which affect the initial amount of 2,500 € with probabilities of their occurrence 40%, 15%, 15% and 30%, respectively. a) Using the Taylor approximation to certainty equivalent, calculate an approximate expected utility value. b) Calculate the certain equivalent of the investor's uncertain wealth. Interpret.
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
Lucy and Henry each have $1652. Each knows that with 0.1 probability, they will lose 85% of their wealth. They both have the option of buying a units of insurance, with each unit costing $0.1. Each unit of insurance pays out $1 in the event the loss occurs. The cost of the insurance policy is paid regardless of whether the loss is incurred. Lucy's utility is given by u²(x) = x, Henry's utility is given by u¹(x) = √√x. Answer the following: (If rounding is needed, only round at the end and write your answer to three decimal places.) a) Without insurance, what is the expected value of the loss? b) c) d). e) ( For Henry, facing the "lottery " above without any insurance is as bad as losing how many dollars for sure? Find Lucy's utility maximising choice of a. If more than 1 exist, enter the largest a. Now suppose insurance costs $0.2. Find Lucy's utility maximising choice of a. If more than 1 exist, enter the largest a. What is Henry's utility maximising choice of a with the new price of…
A seller has an indivisible asset to sell. Her reservation value for the asset is s, which she knows privately. A potential buyer thinks that the assetís value to him is b, which he privately knows. Assume that s and b are independently and uniformly drawn from [0, 1]. If the seller sells the asset to the buyer for a price of p, the seller's payoff is p - s and the buyer's payoffis b - p. Suppose the buyer makes a take-it-or-leave-it offer p to the seller. What's the optimal offer if the buyer's value is b = 1/2?
PLEASE HOW TO THINK ABOUT IT AND SOLVE