- = £200 in a Consider Luna who is facing the following gamble. With probability p = ½½ she will end up in a "bad state" and consume x1 = £10 and with probability 1 p = ½ she will consume xg "good state". Luna's utility can be represented as u (xi) = ln (x;), where i b, g. Suppose there is an insurance contract available to Luna offering K units of insurance for a premium of K. Which statement is true? A. After purchasing the insurance contract which maximises Luna's expected utility, she will enjoy £31 in the bad state and £186 in the good state. B. Luna will not purchase any insurance at the proposed rate. C. The insurance rate is actuarially fair. D. After purchasing the insurance contract which maximises Luna's expected utility, she will enjoy £40 in the bad state and £190 in the good state. E. Luna's optimal insurance contract involves purchasing at least K : = £40 of insurance.
- = £200 in a Consider Luna who is facing the following gamble. With probability p = ½½ she will end up in a "bad state" and consume x1 = £10 and with probability 1 p = ½ she will consume xg "good state". Luna's utility can be represented as u (xi) = ln (x;), where i b, g. Suppose there is an insurance contract available to Luna offering K units of insurance for a premium of K. Which statement is true? A. After purchasing the insurance contract which maximises Luna's expected utility, she will enjoy £31 in the bad state and £186 in the good state. B. Luna will not purchase any insurance at the proposed rate. C. The insurance rate is actuarially fair. D. After purchasing the insurance contract which maximises Luna's expected utility, she will enjoy £40 in the bad state and £190 in the good state. E. Luna's optimal insurance contract involves purchasing at least K : = £40 of insurance.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:-
=
£200 in a
Consider Luna who is facing the following gamble. With probability p = ½½ she will end up in a "bad
state" and consume x1 = £10 and with probability 1 p = ½ she will consume xg
"good state". Luna's utility can be represented as u (xi) = ln (x;), where i b, g. Suppose there is
an insurance contract available to Luna offering K units of insurance for a premium of K. Which
statement is true?
A. After purchasing the insurance contract which maximises Luna's expected utility, she will enjoy
£31 in the bad state and £186 in the good state.
B. Luna will not purchase any insurance at the proposed rate.
C. The insurance rate is actuarially fair.
D. After purchasing the insurance contract which maximises Luna's expected utility, she will enjoy
£40 in the bad state and £190 in the good state.
E. Luna's optimal insurance contract involves purchasing at least K :
=
£40 of insurance.
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