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Question 4 C where The galaxy is (still) a violent place. The market for insurance is booming. Yoda is thinking about getting accident insurance so
Question 4 C where The galaxy is (still) a violent place. The market for insurance is booming. Yoda is thinking about getting accident insurance so that he can compensate for lost income in case of an accident where he gets hurt. Yoda has an accident with probability 0,2. If there is no accident, Yodas wealth is 1000 (he can then work as a Jedi magician). If Yoda suffers an accident he suffers a loss of 900 in terms of lost income. Thanks to a lot of yoga, Yodas utility from wealth in each state of the world i E {1, 2} is u(ci) - Ci is the wealth in state i. a) Write down Yoda's expected utility function and calculate the actual number. (2 points) b) Yoda can choose to buy accident insurance which would pay out K in the case of an accident. For this insurance contract he would have to pay 0,4 * K. Write down Yodas new expected utility function (including the insurance). (4 points) c) How much insurance would Yoda buy? Explain your answer mathematically and intuitively and relate you answer to the price of insurance! (6 points) d) In an alternative universe Yodas utility function is u(ci) = c. How much insurance would this version of Yoda buy? Explain! (3 points) Question 4 C where The galaxy is (still) a violent place. The market for insurance is booming. Yoda is thinking about getting accident insurance so that he can compensate for lost income in case of an accident where he gets hurt. Yoda has an accident with probability 0,2. If there is no accident, Yodas wealth is 1000 (he can then work as a Jedi magician). If Yoda suffers an accident he suffers a loss of 900 in terms of lost income. Thanks to a lot of yoga, Yodas utility from wealth in each state of the world i E {1, 2} is u(ci) - Ci is the wealth in state i. a) Write down Yoda's expected utility function and calculate the actual number. (2 points) b) Yoda can choose to buy accident insurance which would pay out K in the case of an accident. For this insurance contract he would have to pay 0,4 * K. Write down Yodas new expected utility function (including the insurance). (4 points) c) How much insurance would Yoda buy? Explain your answer mathematically and intuitively and relate you answer to the price of insurance! (6 points) d) In an alternative universe Yodas utility function is u(ci) = c. How much insurance would this version of Yoda buy? Explain! (3 points)
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