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There are two possible outcomes, Outcomes A and B. Suppose that Mr Morrison considers whether he should buy an insurance and the insurance premium is
There are two possible outcomes, Outcomes A and B. Suppose that Mr Morrison considers whether he should buy an insurance and the insurance premium is $10.00. Suppose that Mr Morrison's payoffs, exclusive of the insurance premium p, are given as follows: Gain Insurance Payment Outcome A $20.00 $0.00 Outcome B -$6.00 $16.00 a. (1 marks) Suppose Mr Morrison buys the insurance. When Outcome A happens, what is his payoff? b. (1 marks) Suppose Mr Morrison buys the insurance. When Outcome B happens, what is his payoff? For the following questions, suppose that both outcomes are equally likely (meaning that each outcome arises with 50% chance). c. (1 marks) What is Mr Morrison's expected payoff? d. (4 marks) Suppose that Mr Morrison's utility function is u(w) = 2w --w2, where w is his monetary outcome. Calculate Mr Morrison's expected utility with and without the insurance. e. (2 marks) Should Mr Morrison buy the insurance? Why or why not
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