)Suppose a driver has a 6% of having one accident a year. In case of an accident the value of the car is reduced from $25,000 to $5,000. If driver buys an insurance policy the insurance company would completely cover damage to the car (essentially restoring its value to its initial level). Assume that the driver's utility function is U = VW. a) If price of the insurance policy (premium) is $1500, would this driver be willing to purchase the policy? Explain Show you computations %3D b) What would be the maximum price a driver with 10% chance of accident be willing to pay for the insurance policy?

ENGR.ECONOMIC ANALYSIS
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ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
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1.
) Suppose a driver has a 6% of having one accident a year. In case of an accident
the value of the car is reduced from $25,000 to $5,000. If driver buys an insurance policy the
insurance company would completely cover damage to the car (essentially restoring its value
to its initial level). Assume that the driver's utility function is U = VW.
a) If price of the insurance policy (premium) is $1500, would this driver be willing to
purchase the policy? Explain Show you computations
b) What would be the maximum price a driver with 10% chance of accident be willing to
pay for the insurance policy?
Transcribed Image Text:1. ) Suppose a driver has a 6% of having one accident a year. In case of an accident the value of the car is reduced from $25,000 to $5,000. If driver buys an insurance policy the insurance company would completely cover damage to the car (essentially restoring its value to its initial level). Assume that the driver's utility function is U = VW. a) If price of the insurance policy (premium) is $1500, would this driver be willing to purchase the policy? Explain Show you computations b) What would be the maximum price a driver with 10% chance of accident be willing to pay for the insurance policy?
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