Suppose you currently have $223,300 invested in liquid assets and you want to purchase home insurance...

 

Transcribed Image Text:

Suppose you currently have $223,300 invested in liquid assets and you want to purchase home insurance policy to cover (potential) property damage. There is 10% probability of experiencing a $2,000 damage, 0.95% probability of experiencing a $15,000 damage, and 0.05% probability of experiencing a $200,000 damage. W1-y. 1-y Part A) If you have a power utility function (i.e., U(W) = with y 1, what is the maximum insurance premium you are willing to pay (reservation price) for a plan that covers all losses with no deductible? Part B) If the insurance broker gives you an offer to pay $400 as insurance premium but having $1,000 deductible, would you accept the offer? Why? If you want to use calculator, keep at least 5 digits after the decimal point when rounding the numbers. Suppose you currently have $223,300 invested in liquid assets and you want to purchase home insurance policy to cover (potential) property damage. There is 10% probability of experiencing a $2,000 damage, 0.95% probability of experiencing a $15,000 damage, and 0.05% probability of experiencing a $200,000 damage. W1-y. 1-y Part A) If you have a power utility function (i.e., U(W) = with y 1, what is the maximum insurance premium you are willing to pay (reservation price) for a plan that covers all losses with no deductible? Part B) If the insurance broker gives you an offer to pay $400 as insurance premium but having $1,000 deductible, would you accept the offer? Why? If you want to use calculator, keep at least 5 digits after the decimal point when rounding the numbers.

Answer rating: 100% (QA)

ChatGPT To solve this problem well use the expected utility framework to determine the maximum premium youre willing to pay for insurance and evaluate the offer provided by the broker Given Initial we... View the full answer