Question 2 A person has a wealth of $20,000 but faces an accident that results in a loss of $12,000 with probability. p. Suppose that Bernoulli utility is given by u(x) = -1/x. 1. Determine the maximum amount of money the person is willing to pay for complete coverage (as a function of p). 2. Now suppose that an insurance company offers an insurance contract with a deductible of $2,000. Again, determine the maximum amount of money a person is willing to pay for this insurance contract.

Question 2 A person has a wealth of $20,000 but faces an accident that results in a loss of $12,000 with probability. p. Suppose that Bernoulli utility is given by u(x) = -1/x. 1. Determine the maximum amount of money the person is willing to pay for complete coverage (as a function of p). 2. Now suppose that an insurance company offers an insurance contract with a deductible of $2,000. Again, determine the maximum amount of money a person is willing to pay for this insurance contract.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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