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 onepound of coverage.How much insurance coverage will the individual choose to buy?O a.£30 000Ob.£40 000O c.£80 000O d. £60 000

A normal utility maximiser is a hypothetical specialist who thinks about its activities, processes…

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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

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