With an initial wealth of $160,000, a consumer who abides by the von Neumann-Morgenstern axioms faces a fire risk. A big fire with a loss of 70,000 has a 5% 0.5 chance of happening, while a disastrous fire with a loss of 120,000 has a 5% chance of happening. U = W is the utility function for her. She is given the option to purchase an insurance policy with a deductibility clause requiring her to pay the initial $7620 of any fire losses. What is the highest premium she is prepared to pay for this coverage?
With an initial wealth of $160,000, a consumer who abides by the von Neumann-Morgenstern axioms faces a fire risk. A big fire with a loss of 70,000 has a 5% 0.5 chance of happening, while a disastrous fire with a loss of 120,000 has a 5% chance of happening. U = W is the utility function for her. She is given the option to purchase an insurance policy with a deductibility clause requiring her to pay the initial $7620 of any fire losses. What is the highest premium she is prepared to pay for this coverage?
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.1P
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![With an initial wealth of $160,000, a consumer who abides by the von Neumann-Morgenstern axioms faces a fire risk. A big fire with a loss of 70,000 has a 5%
0.5
chance of happening, while a disastrous fire with a loss of 120,000 has a 5% chance of happening. U = W is the utility function for her. She is given the option to
purchase an insurance policy with a deductibility clause requiring her to pay the initial $7620 of any fire losses. What is the highest premium she is prepared to pay
for this coverage?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe8f53b54-5c7a-4532-bf57-7b68cbc35986%2F136a7c23-1186-42c2-a641-2171cfcd82cb%2Fous1xvm_processed.jpeg&w=3840&q=75)
Transcribed Image Text:With an initial wealth of $160,000, a consumer who abides by the von Neumann-Morgenstern axioms faces a fire risk. A big fire with a loss of 70,000 has a 5%
0.5
chance of happening, while a disastrous fire with a loss of 120,000 has a 5% chance of happening. U = W is the utility function for her. She is given the option to
purchase an insurance policy with a deductibility clause requiring her to pay the initial $7620 of any fire losses. What is the highest premium she is prepared to pay
for this coverage?
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