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Suppose there are two types of holiday travellers: adventure-seeking and relaxation-seeking. Adventure-seeking travellers enjoy physically challenging outdoor activities such as hiking, mountain biking, scuba diving
Suppose there are two types of holiday travellers: adventure-seeking and relaxation-seeking. Adventure-seeking travellers enjoy physically challenging outdoor activities such as hiking, mountain biking, scuba diving etc. They have a E probability of an accident during their holiday, which causes them to incur a loss of 1,600. Relaxation-seeking travellers enjoy restful activities in a scenic environment, such as spending time by the beach. They have a % probability of an accident during their holiday, which causes them to incur a loss of 1,600. Assume all travellers are expected utility maximisers with initial wealth of 2,500 and a utility function u(x) = J}. (a) Upload your completed coversheet. [0 marks] (b) Draw a diagram whose axes depict wealth in the event of no accident (x1) and in the event of an accident (x2), including the potential outcomes from travel, as well as an indifference cu rve for each travellertype reflecting the expected uti lity from their lottery. Find expected utility for each traveller type. [8 marks] (c) Assume a competitive travel insurance market where risk neutral insurance firms can enter and exit freely and are able to distinguish adventure-seeking from relaxation-seeking travellers. (i) What premium per unit of travel insurance would you expect insurance firms to charge each type of traveller and how much insurance would you expect each traveller type to buy? Explain your reasoning and add the corresponding fair odds line and final outcome for each type of traveller to your graph. [8 marks]
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