expected utility maximiser owns a car worth £60000£60000 and has a bank account with £20000£20000. The money in the bank is safe, but there is a 50%50% probability that the car will be stolen. The utility of wealth for the agent is u(y)=ln(y)u(y)=ln⁡(y) and they have no other assets.

ENGR.ECONOMIC ANALYSIS
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ISBN:9780190931919
Author:NEWNAN
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Chapter1: Making Economics Decisions
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Q1) 

An expected utility maximiser owns a car worth £60000£60000 and has a bank account with £20000£20000. The money in the bank is safe, but there is a 50%50% probability that the car will be stolen. The utility of wealth for the agent is u(y)=ln(y)u(y)=ln⁡(y) and they have no other assets.

 

Consider the setup from Question 1. A risk-neutral insurance company is willing to insure the car at the premium of T = £2/3 for every one
pound of coverage.
How much insurance coverage will the individual choose to buy?
O a.
£30 000
Ob.
£40 000
O c.
£80 000
O d. £60 000
Transcribed Image Text:Consider the setup from Question 1. A risk-neutral insurance company is willing to insure the car at the premium of T = £2/3 for every one pound of coverage. How much insurance coverage will the individual choose to buy? O a. £30 000 Ob. £40 000 O c. £80 000 O d. £60 000
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