Suppose that consumers have utility function U(C) = log(C) where C is the consumption level and log is the natural logarithm. Consumers have initial consumption levels of 100 and are exposed to the following risk of loss: lose 10 with probability 0.4 and lose 5 with probability 0.6. They are considering buying insurance to cover these losses. What is the certainty equivalent level of C when uninsured? (Hint: Find the consumption level C E such that U(C E ) equals the expected utility when uninsured.)
Suppose that consumers have utility function U(C) = log(C) where C is the consumption level and log is the natural logarithm. Consumers have initial consumption levels of 100 and are exposed to the following risk of loss: lose 10 with probability 0.4 and lose 5 with probability 0.6. They are considering buying insurance to cover these losses. What is the certainty equivalent level of C when uninsured? (Hint: Find the consumption level C E such that U(C E ) equals the expected utility when uninsured.)
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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Suppose that consumers have utility function U(C) = log(C) where C is the consumption level and log is the natural logarithm. Consumers have initial consumption
levels of 100 and are exposed to the following risk of loss: lose 10 with probability
0.4 and lose 5 with probability 0.6. They are considering buying insurance to cover
these losses.
What is the certainty equivalent level of C when uninsured? (Hint: Find
the consumption level C
E
such that U(C
E
) equals the expected utility when
uninsured.)
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