The Utility fct is U = W2/3 + 1000 Flood occurs with Probabilities=1/20. The Value of house $540,000 if no flood. After a flood, the value is $40,000. Cost of insurance is 0.20 cents per dollar. a. Calculate EU b. Calculate EV c. Calculate CE d. Calculate RP e. Calculate the variance and standard deviation f. How much insurance should you buy? Assume your are paying premium in all event. g. What is the expected profit of the insurance company? h. Calculate the coefficient of absolute risk aversion i. Calculate the coefficient of relative risk aversion

Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter17: Making Decisions With Uncertainty
Section: Chapter Questions
Problem 17.2IP
Question

Economics

Uncertainty
The Utility fct is U = W2/3 + 1000
Flood occurs with
Probabilities=1/20. The Value of house $540,000 if no flood. After a
flood, the value is $40,000. Cost of insurance is 0.20 cents per dollar.
a. Calculate EU
b. Calculate EV
c. Calculate CE
d. Calculate RP
e. Calculate the variance and standard deviation
f. How much insurance should you buy? Assume your are paying premium in all event.
g. What is the expected profit of the insurance company?
h. Calculate the coefficient of absolute risk aversion
i. Calculate the coefficient of relative risk aversion
Transcribed Image Text:Uncertainty The Utility fct is U = W2/3 + 1000 Flood occurs with Probabilities=1/20. The Value of house $540,000 if no flood. After a flood, the value is $40,000. Cost of insurance is 0.20 cents per dollar. a. Calculate EU b. Calculate EV c. Calculate CE d. Calculate RP e. Calculate the variance and standard deviation f. How much insurance should you buy? Assume your are paying premium in all event. g. What is the expected profit of the insurance company? h. Calculate the coefficient of absolute risk aversion i. Calculate the coefficient of relative risk aversion
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