Max owns a car. With probability 0.1 she gets into an accident and is left with $2500 (net). If she doesn't have an accident she is left with $10,000. Her value of money when there is an accident is u(x) = x0.5 and when she is safe it is u(x) = 10x0.5. She is offered insurance at the rate of $0.2 per $1 of benefit paid our when she has an accident. (a) What is her MRS?
Max owns a car. With probability 0.1 she gets into an accident and is left with $2500 (net). If she doesn't have an accident she is left with $10,000. Her value of money when there is an accident is u(x) = x0.5 and when she is safe it is u(x) = 10x0.5. She is offered insurance at the rate of $0.2 per $1 of benefit paid our when she has an accident. (a) What is her MRS?
Algebra for College Students
10th Edition
ISBN:9781285195780
Author:Jerome E. Kaufmann, Karen L. Schwitters
Publisher:Jerome E. Kaufmann, Karen L. Schwitters
Chapter8: Functions
Section8.7: Direct And Inverse Variation
Problem 36PS
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Transcribed Image Text:Max owns a car. With probability 0.1 she gets into an accident and is left with $2500 (net). If she
doesn't have an accident she is left with $10, 000. Her value of money when there is an accident is
u(x) = x0.5 and when she is safe it is u(x) = 10x0.5. She is offered insurance at the rate of $0.2
per $1 of benefit paid our when she has an accident.
(a) What is her MRS?
(b) What is her OC of an extra dollar in the accident state?
(c) What is her risk premium?
(d) What is the maximum insurance premium she is willing to pay to eliminate risk?
(e) Is the insurance she is offered fair?
(f) How much insurance does she choose to buy?
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