Answered step by step
Verified Expert Solution
Question
1 Approved Answer
M23 A grocery store owners utility of income y is represented by the utility function U(y) = ln(y). She earns 100 000 per year, but
M23 A grocery store owners utility of income y is represented by the utility function U(y) = ln(y). She earns 100 000 per year, but there is a 10% chance of the store catching fire, in which case she stands to lose 50 000 in terms of merchandise destroyed and repair to the store. (a-J Show that the certainty equivalent of the grocer is equal to 93 303 and determine the corresponding risk-premium. Would the risk-premium of the 50 000 loss be higher or lower if the original earnings would have 200' 000 instead of 100 000? Determine the maximum premium the grocery's owner is willing to pay for a full insurance. Provide real-world examples in which there is only partial cover in insurance contracts. This part is more difficult and aims to give one reason why partial cover is frequently observed in the real world. Suppose the insurance company offers a exible policy with a premium of 0.126 per 1 of loss. As a consequence, the owner decides to insure herself for a cover of almost 28 000. Verify this, and explain why the owner takes only partial cover at this premium. Discuss whether partial cover in the examples mentioned in Part (b) can be explained by the reasoning of Part (c..) What might be other reasons for partial cover
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started