Uncertainty and Insurance3) There are 3 agents, one risk averse, another risk neutral, and the third is risk preferring. Theyeach have $9 in wealth and face a 5/9 probability of losing all $9 of their wealth. Their utilityfunctions are:1Risk Averse Agent: U(W) = 5/w = 5 W 2Risk Neutral Agent: U(W)=(2×W)+33Risk Preferring Agent: U(W)= 2 W 2For each agent, compute their expected utilities under the risky situation and if they purchasedactuarially fair insurance. Decide whether they would prefer to buy the insurance, be indifferent,or prefer the risky situation to being insured.

Given information 3 agents are given Utility functions of all 3 agents Each agent has wealth = $9…

Uncertainty and Insurance 3) There are 3 agents, one risk averse, another risk neutral, and the third is risk preferring. They each have $9 in wealth and face a 5/9 probability of losing all $9 of their wealth. Their utility functions are: Risk Averse Agent: U(W)= 5/w = 5 W 2 %3D Risk Neutral Agent: U(W)=(2×W)+3 Risk Preferring Agent: U(W)= 2| w 2 For each agent, compute their expected utilities under the risky situation and if they purchased actuarially fair insurance. Decide whether they would prefer to buy the insurance, be indifferent, or prefer the risky situation to being insured.

Uncertainty and Insurance 3) There are 3 agents, one risk averse, another risk neutral, and the third is risk preferring. They each have $9 in wealth and face a 5/9 probability of losing all $9 of their wealth. Their utility functions are: Risk Averse Agent: U(W)= 5/w = 5 W 2 %3D Risk Neutral Agent: U(W)=(2×W)+3 Risk Preferring Agent: U(W)= 2| w 2 For each agent, compute their expected utilities under the risky situation and if they purchased actuarially fair insurance. Decide whether they would prefer to buy the insurance, be indifferent, or prefer the risky situation to being insured.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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