Raymond has initial wealth Wo 100, 000 and faces a potential loss of / = 70, 000 with probability p = 0.1. His utility function over wealth is given by u(w) = In(w). Wuntsch Insurance offers him four insurance contracts, described below: %3! Premium, h Deductible, d Contract A 9,000 Contract B 8,400 4,000 Contract C 7,500 12,000 Contract D 6,000 24,000 (a) Compare the four contracts on the basis of the expected profit they generate for Wuntsch Insurance. Which one gives the highest expected profit? (b) Use expected utility to determine which, if any, of the contracts Raymond would purchase. (c) What is the maximum premium that Raymond would be willing to pay for full insurance?

Raymond has initial wealth Wo 100, 000 and faces a potential loss of / = 70, 000 with probability p = 0.1. His utility function over wealth is given by u(w) = In(w). Wuntsch Insurance offers him four insurance contracts, described below: %3! Premium, h Deductible, d Contract A 9,000 Contract B 8,400 4,000 Contract C 7,500 12,000 Contract D 6,000 24,000 (a) Compare the four contracts on the basis of the expected profit they generate for Wuntsch Insurance. Which one gives the highest expected profit? (b) Use expected utility to determine which, if any, of the contracts Raymond would purchase. (c) What is the maximum premium that Raymond would be willing to pay for full insurance?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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