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.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.5P

See similar textbooks

Similar questions

1. A customer has utility function u(x) = log(x + 1000). The customer’scurrent wealth is $28,000. The customer’s car has a value of $14,700. Theprobability of the car being stolen is 0.016. How much would the customerbe willing to pay for insurance against the car being stolen?
5. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = √√x. There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. b) What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?
. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain.
Question 2 A person has a wealth of $20,000 but faces an accident that results in a loss of S12,000 with probability, p. Suppose that Bermoulli 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.
Anita bought a new scooter for $500. She is deciding whether she should insureher scooter against theft. She has recently read in the news that one out of 10 scooters arestolen in her town. She can buy scooter theft insurance at the price of 12 cents per $1 ofinsurance. How much insurance will Anita buy if her utility function is U(C) = 2C + 100?
Question 18 A decision maker is risk averse with current wealth equal to $90,000 and the utility functionu = w2. An accident can occur with probability .2 and damages due to the accident are $27,500. Answer each of the following questions. a. If a premium of $5500 for full insurance coverage were offered to the decision maker, then the decision maker would take the offer b. The maximum premium that the decision maker would pay for full coverage is $5900 c. Suppose that the insurance company has transactions costs. Then at a premium of $5500, the insurance company will break even
1. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,00 A. Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. B. What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?
Utility Theory You live in an area that has a possibility of incurring a massive earthquake, so you are considering buyingearthquake insurance on your home at an annual cost of $180. The probability of an earthquake damagingyour home during one year is 0.001. If this happens, you estimate that the cost of the damage (fully coveredby earthquake insurance) will be $160,000. Your total assets (including your home) are worth $250,000. A. Apply Bayes’ decision rule to determine which alternative (take the insurance or not) maximizes yourexpected assets after one year.
5. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = √x. There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. I Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?
5) A person with a current wealth of $100,000 who faces the prospect of 25 percent chance of losing his or her $20,000 automobile through theft during the next year. Suppose this person's utility function is U(Y) = InY. a). If this person takes no action, what is the expected utility? b). What is the actuarially fair premium? What is his expected utility if he purchase this insurance. c). Suppose that now the insurance company provides a new type of insurance. This insurance costs $4900 and requires the individual to incur the first $1000 of the loss from theft would yield. That is expected utility of this new insurance? Will the person choose the insurance in b) or c)?
. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) √x . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain.
. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = square root x. There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. b) What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?