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3. (10 points Insurance Demand) Skipper has riskless assets of $30,000, a car worth $20,000 and a risk-averse utility function of u(w) = 3VW. His
3. (10 points Insurance Demand) Skipper has riskless assets of $30,000, a car worth $20,000 and a risk-averse utility function of u(w) = 3VW. His car is subject to the fol- lowing loss distribution: P(L) L 20,000 0.01 0.05 5,000 1,000 0.10 0 0.84 a. Calculate the expected loss, the expected value of the car, Skipper's expected utili- ty without insurance, the certainty equivalent and risk premium of the car, and the maximum premium for full coverage. (8 points) b. Would Skipper buy full insurance for a premium of $585? What is the maximum loading he would tolerate? (2 points)
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