John is sending a package worth 900. There is 20% chance that the package will be...
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John is sending a package worth 900. There is 20% chance that the package will be lost in transit. An insurance company offers him an insurance against that event for a price of 30. John's utility function is U(x) = x. a) Is John risk averse, risk neutral or risk loving? Write down another utility function that shows the same type of risk attitude as John. Draw John's utility function on a graph (the graph should show the main feature, e.g., concave, linear or convex. You do not need to plot coordinates on the graph). (10 marks) b) Will John buy the insurance for a price of 30? Explain. (10 marks) c) What is the maximum price Johr, is willing to pay for the insurance? Explain. (10 marks) John is sending a package worth 900. There is 20% chance that the package will be lost in transit. An insurance company offers him an insurance against that event for a price of 30. John's utility function is U(x) = x. a) Is John risk averse, risk neutral or risk loving? Write down another utility function that shows the same type of risk attitude as John. Draw John's utility function on a graph (the graph should show the main feature, e.g., concave, linear or convex. You do not need to plot coordinates on the graph). (10 marks) b) Will John buy the insurance for a price of 30? Explain. (10 marks) c) What is the maximum price Johr, is willing to pay for the insurance? Explain. (10 marks)
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Answer rating: 100% (QA)
a Johns utility function is Ux x which is concave indicating that John is risk averse A concave util... View the full answer
Related Book For
Business Statistics
ISBN: 9780321925831
3rd Edition
Authors: Norean Sharpe, Richard Veaux, Paul Velleman
Posted Date:
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