A driver's wealth $100,000 includes a car of$20,000. To install a car alarm costs the driver$1,750. The probability that the car is stolen is0.2 when the car does not have an alarm and0.1 when the car does have analarm. Assume the driver's von Neumann-Morgenstern utility function is U(W) = In(W).Suppose the driver is deciding between thefollowing three options: (a) purchase no carinsurance, do not install car alarm; (b)purchase fair insurance to replace the car, donot install car alarm; and (c) purchase no carinsurance, install car alarm. Of these threeoptions, the driver prefers:A. option (a).B. option (b).C.option (c).D.options (a) and (b).E. options (a) and (c).F. options (b) and (c).G.all options equally.H.none of these options.

Von Neumann-Morgenstern utility function shows the utility experienced by the individual in…

Ș100,0 includ udes a ca OT A driver S wealth $20,000. To install a car alarm costs the driver $1,750. The probability that the car is stolen is 0.2 when the car does not have an alarm and 0.1 when the car does have an alarm. Assume the driver's von Neumann- Morgenstern utility function is U(W) = In(W).

Ș100,0 includ udes a ca OT A driver S wealth $20,000. To install a car alarm costs the driver $1,750. The probability that the car is stolen is 0.2 when the car does not have an alarm and 0.1 when the car does have an alarm. Assume the driver's von Neumann- Morgenstern utility function is U(W) = In(W).

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.3P

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Question

A driver's wealth $100,000 includes a car of
$20,000. To install a car alarm costs the driver
$1,750. The probability that the car is stolen is
0.2 when the car does not have an alarm and
0.1 when the car does have an
alarm. Assume the driver's von Neumann-
Morgenstern utility function is U(W) = In(W).
Suppose the driver is deciding between the
following three options: (a) purchase no car
insurance, do not install car alarm; (b)
purchase fair insurance to replace the car, do
not install car alarm; and (c) purchase no car
insurance, install car alarm. Of these three
options, the driver prefers:
A. option (a).
B. option (b).
C.option (c).
D.options (a) and (b).
E. options (a) and (c).
F. options (b) and (c).
G.all options equally.
H.none of these options.

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A driver's wealth $100,000 includes a car of $20,000. To install a car alarm costs the driver $1,750. The probability that the car is stolen is 0.2 when the car does not have an alarm and 0.1 when the car does have an alarm. Assume the driver's von Neumann-Morgenstern utility function is U(W) = ln(W). Suppose the driver is deciding between the following three options: (a) purchase no car insurance, do not install car alarm; (b) purchase fair insurance to replace the car, do not install car alarm; and (c) purchase no car insurance, install car alarm. Of these three options, the driver prefers: A. option (a). B. option (b). C. option (c). D. options (a) and (b). E. options (a) and (c). F. options (b) and (c). G. all options equally. H. none of these options.
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