6. Insurance. Suppose an individual has initial wealth w. With prob. p an accident occurs such...

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6. Insurance. Suppose an individual has initial wealth w. With prob. p an accident occurs such that she will lose an amount of money L. The individual can buy insurance which pays her q dollars in case the accident happens. The price for insurance is q where is the premium per dollar of coverage. The expected profit of the insurance is given by pq which we assume to be zero due to competition; thus = p. The individual is a risk averse expected utility maximizer with vNM utility v(x) = x5 where x is her final wealth level. How much coverage q does the individual choose to buy? Depict the individual's situation in a 2-states-of-the-world diagram. - 6. Insurance. Suppose an individual has initial wealth w. With prob. p an accident occurs such that she will lose an amount of money L. The individual can buy insurance which pays her q dollars in case the accident happens. The price for insurance is q where is the premium per dollar of coverage. The expected profit of the insurance is given by pq which we assume to be zero due to competition; thus = p. The individual is a risk averse expected utility maximizer with vNM utility v(x) = x5 where x is her final wealth level. How much coverage q does the individual choose to buy? Depict the individual's situation in a 2-states-of-the-world diagram. -

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Analyzing the Insurance Decision 1 Expected Utility Framework The individual is a riskaverse expecte... View the full answer