Question 1: A risk averse agent, whose utility is given by U(r) = lnr and whose wealth is 50,000 is faced with a potential loss of 10,000 with a probability of 0.1. What is the maximum premium he would be willing to pay to protect himself against this loss? What is the minimum premium that an insurer, with the same utility function and wealth 1,000,000 will be willing to charge to cover this loss? Explain the difference beteen the two figures.

College Algebra
1st Edition
ISBN:9781938168383
Author:Jay Abramson
Publisher:Jay Abramson
Chapter9: Sequences, Probability And Counting Theory
Section9.7: Probability
Problem 1SE: What term is used to express the likelihood of an event occurring? Are there restrictions on its...
icon
Related questions
Question
Question 1: A risk averse agent, whose utility is given by U(r) = In r and whose wealth
is 50,000 is faced with a potential loss of 10,000 with a probability of 0.1. What is the
maximum premium he would be willing to pay to protect himself against this loss? What
is the minimum premium that an insurer, with the same utility function and wealth
1,000,000 will be willing to charge to cover this loss? Explain the difference beteen the
two figures.
Transcribed Image Text:Question 1: A risk averse agent, whose utility is given by U(r) = In r and whose wealth is 50,000 is faced with a potential loss of 10,000 with a probability of 0.1. What is the maximum premium he would be willing to pay to protect himself against this loss? What is the minimum premium that an insurer, with the same utility function and wealth 1,000,000 will be willing to charge to cover this loss? Explain the difference beteen the two figures.
Expert Solution
steps

Step by step

Solved in 3 steps

Blurred answer
Recommended textbooks for you
College Algebra
College Algebra
Algebra
ISBN:
9781938168383
Author:
Jay Abramson
Publisher:
OpenStax
Calculus For The Life Sciences
Calculus For The Life Sciences
Calculus
ISBN:
9780321964038
Author:
GREENWELL, Raymond N., RITCHEY, Nathan P., Lial, Margaret L.
Publisher:
Pearson Addison Wesley,