Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Lucy and Henry each have $4321. Each knows that with 0.1 probability, they will lose 85% of their wealth. They both have the option of

image text in transcribed
image text in transcribed
Lucy and Henry each have $4321. Each knows that with 0.1 probability, they will lose 85% of their wealth. They both have the option of buying a units of insurance, with each unit costing $0.1. Each unit of insurance pays out $1 in the event the loss occurs. The cost of the insurance policy is paid regardless of whether the loss is incurred. Lucy's utility is given by u(x) = x. Henry's utility is given by u (x) = Vi. Answer the following: (If rounding is needed, only round at the end and write your answer to three decimal places.) ) (0.5 marks) Without insurance, what is the expected value of the loss? b) (0.5 marks) For Henry, facing the "lottery " above without any insurance is as bad as losing how many dollars for sure? c) (1 mark) Find Lucy's utility maximising choice of o. If more than 1 exist, enter the largest a. d) (1 mark) Now suppose insurance costs $0.2. Find Lucy's utility maximising choice of o. If more than 1 exist, enter the largest o. ) (1 mark) What is Henry's utility maximising choice of o with the new price of 0.2? If more than 1 exist, enter the largest a

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Accounting

Authors: Jan Williams, Susan Haka

17th Edition

126000645X, 9781260006452

More Books

Students also viewed these Economics questions

Question

6. How can a message directly influence the interpreter?

Answered: 1 week ago