There are two types of ladders on the market that can be used for painting: Safe ladders
Question:
There are two types of ladders on the market that can be used for painting: Safe ladders which cost $6 and risky ladders which cost $4. The probability of falling off the safe ladder is 0.10 and the probability of falling off the risky ladder is 0.40. If the painter does not fall then income from painting is $20, if the painter falls then income is going to be $12. [Lower income might be because the painter can?t work next day because of injury]. The utility for each level of income is given below in the picture.
A.Which ladder will be purchased when the painter has no insurance contract against an accident?
B.Now assume that painters can buy an insurance contract for $2. The contract provides the painter with an income of $20 no matter what happens. Which ladder will be purchased?
c.Assume the insurance company can identify risky ladders and safe ladders. If the insurance company sets a price of $2 for safe ladders, what [minimum] price would it have to charge on risky ladders to get painters to buy safe ladders?
Expert Answer:
A The painter would purchase the safe ladder without the insurance since the expected income in the ... View the full answer
