5, Question 6. Suppose that Dave has 100 dollars as initial wealth. He faces two types offinancial loss. The risk of a large financial loss of 30 dollars occurs with the probability0.2. The risk of a small financial loss of 10 dollars occurs with the probability 0.4. Theprobability of no loss is 0.4. An insurance company offers to sell the products that cover10r whenever the loss occurs (regardless of the type of loss), where r is the number ofproduct units that Dave purchases. The price of each unit of the product is 2 and Dave'sbudget constraint for the products is 0 < 2r < 100. Suppose that Dave has a logarithmicutility U(z) = In z. Compute the optimal choice of a to maximize Dave's expected utility.%3D

The initial wealth is 100 dollars. The risk of financial loss is 30 dollars.The probability of…

Question 6. Suppose that Dave has 100 dollars as initial wealth. He faces two types of financial loss. The risk of a large financial loss of 30 dollars occurs with the probability 0.2. The risk of a small financial loss of 10 dollars occurs with the probability 0.4. The probability of no loss is 0.4. An insurance company offers to sell the products that cover 10x whenever the loss occurs (regardless of the type of loss), where x is the number of product units that Dave purchases. The price of each unit of the product is 2 and Dave's budget constraint for the products is 02x ≤ 100. Suppose that Dave has a logarithmic utility U(z) = ln x. Compute the optimal choice of a to maximize Dave's expected utility. ==

Question 6. Suppose that Dave has 100 dollars as initial wealth. He faces two types of financial loss. The risk of a large financial loss of 30 dollars occurs with the probability 0.2. The risk of a small financial loss of 10 dollars occurs with the probability 0.4. The probability of no loss is 0.4. An insurance company offers to sell the products that cover 10x whenever the loss occurs (regardless of the type of loss), where x is the number of product units that Dave purchases. The price of each unit of the product is 2 and Dave's budget constraint for the products is 02x ≤ 100. Suppose that Dave has a logarithmic utility U(z) = ln x. Compute the optimal choice of a to maximize Dave's expected utility. ==

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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