Pierre considers buying K items of car insurances, which pay $1 in case of an accident,...
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Pierre considers buying K items of car insurances, which pay $1 in case of an accident, at the cost of y each. The insurance estimates the probability of an accident as 20% for the type of car Pierre is driving. His utility of consuming c is U(c) = √c. Denote by ca his consumption in the case of an accident and cn his consumption in the case of no accident. In case of an accident, he will buy a new car immediately, thus his consumption reduces if he does not buy the insurance. His von-Neumann-Morgenstern Utility function is therefore U(ca, Cn) = 0.2√√ca + 0.8√Cn. His brand-new car is worth L = $4,000 and his income is m = $4,000. What is the fair price for the insurance? Justify your finding. Find Pierre's budget constraint. Determine and interpret the slope. How much of the insurance will he buy? Give a justification. a. b. C. d. (20%) (30%) (20%) If the insurance price is fair, what can you say about Pierre's state-contingent consumption? Explain. (30%) Pierre considers buying K items of car insurances, which pay $1 in case of an accident, at the cost of y each. The insurance estimates the probability of an accident as 20% for the type of car Pierre is driving. His utility of consuming c is U(c) = √c. Denote by ca his consumption in the case of an accident and cn his consumption in the case of no accident. In case of an accident, he will buy a new car immediately, thus his consumption reduces if he does not buy the insurance. His von-Neumann-Morgenstern Utility function is therefore U(ca, Cn) = 0.2√√ca + 0.8√Cn. His brand-new car is worth L = $4,000 and his income is m = $4,000. What is the fair price for the insurance? Justify your finding. Find Pierre's budget constraint. Determine and interpret the slope. How much of the insurance will he buy? Give a justification. a. b. C. d. (20%) (30%) (20%) If the insurance price is fair, what can you say about Pierre's state-contingent consumption? Explain. (30%)
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L 4000 m 4000 U Ca cn 2 Ca 8NG buy K Insurance units payYK get benefit K a fair Insurance is whe... View the full answer
Related Book For
Vector Mechanics for Engineers Statics and Dynamics
ISBN: 978-0073212227
8th Edition
Authors: Ferdinand Beer, E. Russell Johnston, Jr., Elliot Eisenberg, William Clausen, David Mazurek, Phillip Cornwell
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