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Sonja is considering buying accident insurance for her car. She has $10000 of income, and her car is worth $2000. If the car is in
Sonja is considering buying accident insurance for her car. She has $10000 of income, and her car is worth $2000. If the car is in an accident, and she is uninsured, she loses its entire value. Let her consumption in the "good" state (where no accident occurs) be cg, and her consumption in the "bad" state (where an accident occurs) be cb. The probability of the bad state occurring is 0.1 . Sonja's preferences over contingent consumption can be represented by the Expected Utility function EU(cg,cb)=0.1(cb)2+0.9(cg)2 If insurance costs $0.10 per dollar of coverage, how much insurance does Sonja buy? (HINT: you do not need to calculate any derivatives to answer this question) A. $0 B. $2000 C. $200 D. $160 E. Not enough information to tell
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