My current wealth is $1000 and I have exponential utility with a=0.001. There is a 4% chance that my basement will start leaking next week, in which case I will have to spend $400 to fix the problem. I am offered an insurance contract that costs c today, and will pay for any future repairs in the event it does start leaking. (a) What is my utility if I do not purchase the insurance and my roof does not leak? u(1000) v utiles. (b) What is my utility if I do not purchase the insurance and my roof does leak? u(600) v utiles. (c) What is my utility if I purchase the insurance? u(1000-c) utiles.

My current wealth is $1000 and I have exponential utility with a=0.001. There is a 4% chance that my basement will start leaking next week, in which case I will have to spend $400 to fix the problem. I am offered an insurance contract that costs c today, and will pay for any future repairs in the event it does start leaking. (a) What is my utility if I do not purchase the insurance and my roof does not leak? u(1000) v utiles. (b) What is my utility if I do not purchase the insurance and my roof does leak? u(600) v utiles. (c) What is my utility if I purchase the insurance? u(1000-c) utiles.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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