1. Suppose that a person has initial wealth equal to $10,000. There is a 10% chance...

   

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1. Suppose that a person has initial wealth equal to $10,000. There is a 10% chance the person will be in a minor car accident that will result in a loss of $1,900, leaving the person with $8,100. Suppose that the person has utility function U(w) (a) Compute each of the following: i. the expected value of the person's wealth; ii. the person's expected utility; iii. the risk premium. (b) True or False: This person is risk averse. Explain. = w. (c) Suppose that the person can buy insurance that fully covers the losses. i. Show that the actuarially fair premium for this insurance is $190. ii. Would the consumer buy this insurance? Why or why not? (d) If the consumer can reduce the probability of getting into an accident by driving more carefully, why might an insurance company not offer the insurance policy described in part (c)? 1. Suppose that a person has initial wealth equal to $10,000. There is a 10% chance the person will be in a minor car accident that will result in a loss of $1,900, leaving the person with $8,100. Suppose that the person has utility function U(w) (a) Compute each of the following: i. the expected value of the person's wealth; ii. the person's expected utility; iii. the risk premium. (b) True or False: This person is risk averse. Explain. = w. (c) Suppose that the person can buy insurance that fully covers the losses. i. Show that the actuarially fair premium for this insurance is $190. ii. Would the consumer buy this insurance? Why or why not? (d) If the consumer can reduce the probability of getting into an accident by driving more carefully, why might an insurance company not offer the insurance policy described in part (c)?