Jill possesses $160,000 worth of valuables. She faces a 0.02 probability of a burglary, where she would lose jewelry worth $70,000. Her utility function is U = 4X¹/2, where X is final worth in dollars. Show your work for each part below. a. Calculate AND interpret Jill's risk premium. b. What is the most that Jill would be willing to pay for an insurance policy that fully covers her against loss? c. What is the most that Jill would have to pay for fair insurance: a contract between an insurer and a policyholder in which the expected value of the contract to the policyholder is zero. You can learn more about "actuarially fair insurance" by watching this video.
Jill possesses $160,000 worth of valuables. She faces a 0.02 probability of a burglary, where she would lose jewelry worth $70,000. Her utility function is U = 4X¹/2, where X is final worth in dollars. Show your work for each part below. a. Calculate AND interpret Jill's risk premium. b. What is the most that Jill would be willing to pay for an insurance policy that fully covers her against loss? c. What is the most that Jill would have to pay for fair insurance: a contract between an insurer and a policyholder in which the expected value of the contract to the policyholder is zero. You can learn more about "actuarially fair insurance" by watching this video.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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the video link is: https://www.youtube.com/watch?v=aqEz6kvXhc8
please give me detailed solutions and calculations, thank you!
Transcribed Image Text:Jill possesses $160,000 worth of valuables. She faces a 0.02 probability of a burglary, where
she would lose jewelry worth $70,000. Her utility function is U = 4X¹/2, where X is final
worth in dollars. Show your work for each part below.
a. Calculate AND interpret Jill's risk premium.
b. What is the most that Jill would be willing to pay for an insurance policy that fully covers
her against loss?
c.
What is the most that Jill would have to pay for fair insurance: a contract between an
insurer and a policyholder in which the expected value of the contract to the policyholder
is zero. You can learn more about "actuarially fair insurance" by watching this video.
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