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Individuals face potential loss of their wealth. Use the listed information regarding individuals and loss to answer the following questions. Individual's initial wealth: 100,000
Individuals face potential loss of their wealth. Use the listed information regarding individuals and loss to answer the following questions. Individual's initial wealth: 100,000 Loss amount: 50,000 > Probability of loss: 10% > Utility function: u(w) = w a) What is the risk premium that an individual is willing to pay to obtain full coverage insurance? b) Find the optimal insurance coverage for a risk-averse individual if premium rate (premium per unit coverage) is 0.11. Show all the steps of your calculation to earn full credit. c) Derive expressions for the absolute risk aversion and relative risk aversion measures for the utility function, Vw, and explain what they indicate about the individual's desire to hold risky assets.
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Step: 1
a To find the risk premium we need to calculate the expected utility without insurance and with full coverage insurance and then subtract the expected utility without insurance from the expected utili...Get Instant Access to Expert-Tailored Solutions
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