Answered: Question 2 A person has a wealth of… | bartleby

Microeconomic Theory

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.5P

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Question 2 A person has a wealth of $20,000 but faces an accident that results in a loss of
S12,000 with probability, p. Suppose that Bermoulli utility is given by u(x) = -1/x.
1. Determine the maximum amount of money the person is willing to pay for
complete coverage (as a function of p).
2. Now suppose that an insurance company offers an insurance contract with a
deductible of $2,000. Again, determine the maximum amount of money a
person is willing to pay for this insurance contract.

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1. A customer has utility function u(x) = log(x + 1000). The customer’scurrent wealth is $28,000. The customer’s car has a value of $14,700. Theprobability of the car being stolen is 0.016. How much would the customerbe willing to pay for insurance against the car being stolen?
5. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = √√x. There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. b) What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?
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Question 18 A decision maker is risk averse with current wealth equal to $90,000 and the utility functionu = w2. An accident can occur with probability .2 and damages due to the accident are $27,500. Answer each of the following questions. a. If a premium of $5500 for full insurance coverage were offered to the decision maker, then the decision maker would take the offer b. The maximum premium that the decision maker would pay for full coverage is $5900 c. Suppose that the insurance company has transactions costs. Then at a premium of $5500, the insurance company will break even
1. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,00 A. Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. B. What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?
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