-=£200 in aConsider Luna who is facing the following gamble. With probability p = ½½ she will end up in a "badstate" 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 isan insurance contract available to Luna offering K units of insurance for a premium of K. Whichstatement 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.

First of all i would like to introduce about the basic background of Economics so that you can…

Answered: - = £200 in a Consider Luna who is…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Donna just paid $800 for a new iPhone. Apple offers a two year extended warranty for $200 and Donna is considering purchasing it. She has utility given by U(X)=√X. Without the extended warranty, the iPhone becomes worthless if it breaks. What is the minimum probability, p, that the iPhone breaks in the next two years that will cause Donna to prefer to purchase the extended warranty? p=_____________ If the probability that her phone breaks is p=0.25, will Donna will prefer to buy or not buy the warranty?
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