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4) Suppose you own a car worth $53,000. While you have accident insurance your policy does not provide insurance against theft. The insurance company quotes
4) Suppose you own a car worth $53,000. While you have accident insurance your policy does not provide insurance against theft. The insurance company quotes a price of an additional $159 a year to fully insure your car against theft. a. Suppose you are a risk-neutral expected payoff maximiser who has a good estimate of the probability (p [0,1]) that your car might be stolen next year. At what probability p would you be indifferent between insuring and not insuring your car against theft for a premium of $159 a year? (1 mark) b. How would your answer to part a) change if your preferences were characterised by Cumulative Prospect Theory rather than Expected Utility Theory? (1 mark) c. The insurance company also offers partial insurance that pays you 80% of the value of your car (i.e. $42,400) in case of theft and this policy only costs $106 a year. What might be the reason for partial insurance to be much cheaper than full insurance? (1 mark)
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