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0.05 0.04 0.01 0 10 100 400 The entrepreneur's risk exposure in terms of annual losses is as below. Note that entrepreneur also looks at
0.05 0.04 0.01 0 10 100 400 The entrepreneur's risk exposure in terms of annual losses is as below. Note that entrepreneur also looks at risk through his subjective probability of loss. Objective probability Subjective Severity of loss of loss probability of loss 0,80 0.90 0,15 0,04 0,01 The insurer makes a bid to compensate losses at the annual premium of 14. The non-insured losses are not tax exempt. The tax rate is 20% a. Calculate and compare expected loss under the objective probability distribution, and under entrepreneur's subjective distribution b. Find out whether the entrepreneur will accept the bid if he is risk neutral, and uses objective loss probabilities, c. Find out whether the entrepreneur will accept the bid if he exhibits constant risk aversion with the parameter 0,003, and assesses losses through subjective probabilities. Show intermediate steps of your solutions
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