Q2. Bob's wealth is $2500. However, he faces a 50% chance of suffering a $900 loss. Hisutility function is U(w) = √w, Where w is his wealth.a) What is Bob's expected utility?b) What is Bob's cost of risk?c) What is the fair premium an insurer should charge for a full insurance?d) If the insurer set the premium to $500 for a full insurance, will Bob buy it?e) What is the maximum amount Bob would be willing to pay for a full insurance?

Answered: Q2. Bob's wealth is $2500. However, he…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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Q2. Bob's wealth is $2500. However, he faces a 50% chance of suffering a $900 loss. His
utility function is U(w) = √w, Where w is his wealth.
a) What is Bob's expected utility?
b) What is Bob's cost of risk?
c) What is the fair premium an insurer should charge for a full insurance?
d) If the insurer set the premium to $500 for a full insurance, will Bob buy it?
e) What is the maximum amount Bob would be willing to pay for a full insurance?

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utility addresses the satisfaction that purchasers/consumers get for consuming a decent or administration. The utility function estimates customers' preferences for a bunch of goods and services. In economics, the utility capability estimates the government assistance or fulfillment of a shopper as an element of the utilization of genuine merchandise, like food or dress. The utility capability is broadly utilized in objective decision hypotheses to dissect the human way of behaving.

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