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The worth of consumer's house is 160, and her utility function is u(w) = √w. The probability of outbreak of fire is p = 1/2, and the fire will make 120 amount of loss of worth of house. Under the given conditions, consumer can join insurance that pay insurance money as B by pay insurance fee qB. (a) Find the amount of insurance that consumer will join. (b) Derive the condition that consumer will not join insurance. (c) Derive the condition that make consumer join full insurance. (d) Find the B, when the q is given as q = 3/5

The worth of consumer's house is 160, and her utility function is u(w) = √w. The probability of outbreak of fire is p = 1/2, and the fire will make 120 amount of loss of worth of house. Under the given conditions, consumer can join insurance that pay insurance money as B by pay insurance fee qB. (a) Find the amount of insurance that consumer will join. (b) Derive the condition that consumer will not join insurance. (c) Derive the condition that make consumer join full insurance. (d) Find the B, when the q is given as q = 3/5

Principles of Economics 2e
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter16: Information, Risk, And Insurance
Section: Chapter Questions
Problem 11RQ: What is an actuarially fair insurance policy?
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The worth of consumer's house is 160, and her utility function is u(w) = √w. The probability of outbreak of fire is p = 1/2, and the fire will make 120 amount of loss of worth of house. Under the given conditions, consumer can join insurance that pay insurance money as B by pay insurance fee qB. (a) Find the amount of insurance that consumer will join. (b) Derive the condition that consumer will not join insurance. (c) Derive the condition that make consumer join full insurance. (d) Find the B, when the q is given as q = 3/5
Transcribed Image Text:The worth of consumer's house is 160, and her utility function is u(w) = √w. The probability of outbreak of fire is p = 1/2, and the fire will make 120 amount of loss of worth of house. Under the given conditions, consumer can join insurance that pay insurance money as B by pay insurance fee qB. (a) Find the amount of insurance that consumer will join. (b) Derive the condition that consumer will not join insurance. (c) Derive the condition that make consumer join full insurance. (d) Find the B, when the q is given as q = 3/5
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