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Bob is insuring his car against theft. His car is worth $10,000. There is a 10% probability that his car will be stolen. For the
Bob is insuring his car against theft. His car is worth $10,000. There is a 10% probability that his car will be stolen. For the purpose of his insurance problem, there are two states of nature: (1) No theft, and (2) Theft. In the case of no theft, he has an asset worth An = 10,000. In the case of theft his asset is At = 0. Bob is an expected utility maximizer, with expected utility function U(AN, AT) = AN VAN + TVAT. (a) What is Bob's expected asset level given the uncertainty of theft? (b) What is the certainty equivalent of Bob's asset bundle
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