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If you have time to draw a graph of this too thatd be great. otherwise no problem 4. A homeowner faces a 10 percent probability
If you have time to draw a graph of this too thatd be great. otherwise no problem
4. A homeowner faces a 10 percent probability that his house will be burglarized and he will suffer $10,000 loss. Assume his wealth is $50,000. Assume his utility for income is given by the function, u(I)=100I, where I is the income in $1,000s. (For example, utility of consuming $25,000 would be u(25)=10025=500). a. Would the consumer buy insurance if the insurance company covers all the loss at a charge of $1,030? b. Would the consumer buy insurance if the insurance company covers all the loss at a charge of $1,100? c. Calculate the risk premium. d. What is the maximum amount the consumer would pay for this insurance? 4. A homeowner faces a 10 percent probability that his house will be burglarized and he will suffer $10,000 loss. Assume his wealth is $50,000. Assume his utility for income is given by the function, u(I)=100I, where I is the income in $1,000s. (For example, utility of consuming $25,000 would be u(25)=10025=500). a. Would the consumer buy insurance if the insurance company covers all the loss at a charge of $1,030? b. Would the consumer buy insurance if the insurance company covers all the loss at a charge of $1,100? c. Calculate the risk premium. d. What is the maximum amount the consumer would pay for this insuranceStep by Step Solution
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