5 Projection bias - 1 point Think about purchasing car insurance. There are three states of the world: the car is in good state, so nothing is required to be spent on it; the car is in fair state, so it will cost $1,000 to fix it; or the car is in poor state which will require $10,000 to fix it. The probability that the car is in good state is 20%, the probability the car is in fair state is 70% and the probability that the car is in poor state is 10%. You have to decide whether or not to buy car insurance for the next year. If you buy insurance, you are fully insured and you will pay nothing for the car maintenance. Assume that there is no correlation between the current state of the car and its future state. For the questions below, assume that you have risk neutral preferences. 1. What function represents risk neutral preferences? 2. What is the maximum you would be willing to pay for car insurance? Now imagine that you have a form of projection bias. (b) If a = ; and the car's current state is poor, what is the maximum you are willing to pay for car insurance? (c) If a = { and the car's current state is good, what is the maximum you are willing to pay for car insurance? (d) If the car's current state is fair, what is the maximum a such that you will decide to purchase car insurance if it is being sold for $100? 5 Projection bias - 1 point Think about purchasing car insurance. There are three states of the world: the car is in good state, so nothing is required to be spent on it; the car is in fair state, so it will cost $1,000 to fix it; or the car is in poor state which will require $10,000 to fix it. The probability that the car is in good state is 20%, the probability the car is in fair state is 70% and the probability that the car is in poor state is 10%. You have to decide whether or not to buy car insurance for the next year. If you buy insurance, you are fully insured and you will pay nothing for the car maintenance. Assume that there is no correlation between the current state of the car and its future state. For the questions below, assume that you have risk neutral preferences. 1. What function represents risk neutral preferences? 2. What is the maximum you would be willing to pay for car insurance? Now imagine that you have a form of projection bias. (b) If a = ; and the car's current state is poor, what is the maximum you are willing to pay for car insurance? (c) If a = { and the car's current state is good, what is the maximum you are willing to pay for car insurance? (d) If the car's current state is fair, what is the maximum a such that you will decide to purchase car insurance if it is being sold for $100