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Eu B. A person facing a random potential loss L is considering how much insurance to buy. Their expected utility function is u(x) = log(x + 100), their current wealth is w 400, and the cdf of the rand loss L that they face is 0.8 FL(x)= 1 if <0 if x=0 0.8+/160 if 0<<< 32 if 32x. 1. What is the probability that they suffer no loss? 2. What is the expected value of their loss? 3. What is their expected utility if they do not buy any insurance? 4. What is the certainty equivalent of not buying insurance?

Eu B. A person facing a random potential loss L is considering how much insurance to buy. Their expected utility function is u(x) = log(x + 100), their current wealth is w 400, and the cdf of the rand loss L that they face is 0.8 FL(x)= 1 if <0 if x=0 0.8+/160 if 0<<< 32 if 32x. 1. What is the probability that they suffer no loss? 2. What is the expected value of their loss? 3. What is their expected utility if they do not buy any insurance? 4. What is the certainty equivalent of not buying insurance?

Essentials of Economics (MindTap Course List)
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter19: The Basic Tools Of Finance
Section: Chapter Questions
Problem 9PA
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Eu B. A person facing a random potential loss L is considering how much insurance to buy. Their expected utility function is u(x) = log(x + 100), their current wealth is w 400, and the cdf of the rand loss L that they face is 0.8 FL(x)= 1 if <0 if x=0 0.8+/160 if 0<<< 32 if 32x. 1. What is the probability that they suffer no loss? 2. What is the expected value of their loss? 3. What is their expected utility if they do not buy any insurance? 4. What is the certainty equivalent of not buying insurance?
Transcribed Image Text:Eu B. A person facing a random potential loss L is considering how much insurance to buy. Their expected utility function is u(x) = log(x + 100), their current wealth is w 400, and the cdf of the rand loss L that they face is 0.8 FL(x)= 1 if <0 if x=0 0.8+/160 if 0<<< 32 if 32x. 1. What is the probability that they suffer no loss? 2. What is the expected value of their loss? 3. What is their expected utility if they do not buy any insurance? 4. What is the certainty equivalent of not buying insurance?
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