3) Suppose you own a car worth $35,000. While you have accident insurance your policy does...

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3) Suppose you own a car worth $35,000. While you have accident insurance your policy does not cover insurance against theft. The insurance company quotes a price of an additional $140 a year to fully insure your car against theft. a. Suppose you are a risk-neutral expected payoff maximiser who has a good estimate of the probability (p = [0,1]) that your car might be stolen next year. At what probability p would you be indifferent between insuring and not insuring your car against theft for a premium of $140 a year? -) b. How would your answer to part a) change if your preferences were characterised by Cumulative Prospect Theory rather than Expected Utility Theory? 2 c. The insurance company also offers partial insurance that pays you 90% of the value of your car (i.e. $31,500) in case of theft and this policy only costs $70 a year. What might be the reason for partial insurance to be much cheaper than full insurance? 3) Suppose you own a car worth $35,000. While you have accident insurance your policy does not cover insurance against theft. The insurance company quotes a price of an additional $140 a year to fully insure your car against theft. a. Suppose you are a risk-neutral expected payoff maximiser who has a good estimate of the probability (p = [0,1]) that your car might be stolen next year. At what probability p would you be indifferent between insuring and not insuring your car against theft for a premium of $140 a year? -) b. How would your answer to part a) change if your preferences were characterised by Cumulative Prospect Theory rather than Expected Utility Theory? 2 c. The insurance company also offers partial insurance that pays you 90% of the value of your car (i.e. $31,500) in case of theft and this policy only costs $70 a year. What might be the reason for partial insurance to be much cheaper than full insurance?

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Solving the car insurance problem a Riskneutral expected payoff maximizer You are indifferent betwee... View the full answer