Question: An individual has the utility function: u( w) = VW, (1) where w is her wealth (in dollars). The investor's current wealth is currently $1

An individual has the utility function: u( w) = VW, (1) where w is her wealth (in dollars). The investor's current wealth is currently $1 million, 3/4 of which is the value of her house. There is a 10 percent chance that her house will be destroyed by fire. If so, the value of the house is zero. (a) Write down her expected utility. Is she risk-loving, risk neutral, or risk averse?Draw a graph of her utility function and indicate her state-contingent wealth levels. (b) Suppose an insurance company offers the following policy: pay a premium P now; if and when her house burns down the insurance company will pay her in full for its replacement. What is the highest P at which she is willing to buy insurance? (c) Suppose all potential buyers of insurance are like the investor (i.e. have the same wealth, utility function, and risk of fire), and each insurance company insures a lot of them. What is the expected cost per house to an insurance company? An insurance company is willing to provide insurance as long as it earns nonnegative profit. For what range of premia P will the insurance market clear with all households insured

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Economics Questions!

Hi there, I've received a problem set back from my professor & I also got these 2 questions wrong. She hasn't given me feedback so could I have some help on how to answer them. 6) An individual's...

An investor has initial wealth wo that she must divide between two risky assets. Denote the total investment into asset i by w; for i E {1, 2}. There are two possible states H and L for the economy....

Assume there is a riskless treasury security that pays a rate of return equal to r; . In addition, there is one risky security (e.g., S&P 500 index fund) that pays a stochastic rate of return equal...

a) By considering the formulas for the expected return (pp) and standard deviation (Up) of a portfolio with :r: invested in the market asset and 1 x invested in the risk-free asset, show that it is...

well explain ed answers' 1. Consider a homeowner with Von-Neumann and Morgenstern utility function u, where u(x) = 1 - e" for wealth level r, measured in million US dollars. His entire wealth is his...

. Consider a risk averse investor with utility function U (W ) = W^0.5 who is deciding how much of her initial wealth (W 0) to invest in a bond and how much to invest in a stock. The current prices...

answer all cc Question 1: Solow Model (40 points) i. ii. In 3-4 pages, in your own words, delve into a detailed discussion of the three variations of the Solow growth model (the basic Solow model,...

Problem 5 (3 marks). The following is the standard formulation of the utility maximi- sation problem (UMP) in classic demand theory. There are n goods in the economy. A bundle of goods is x = (x1,...

Problem 5 (3 marks). The following is the standard formulation of the utility maximi- sation problem (UMP) in classic demand theory. There are n goods in the economy. A bundle of goods is x = (x1, ....

S h o w yo u r w or k . Answer the questions. In 2016, a country's GDP is $214.8 billion. If the economy experiences 4% economic growth over each of the next two years, what will the be the value of...

Review the Eli Lilly financial statements contained in ID5-14 and, based on the following assumptions, prepare a simplified 2009 income statement and balance sheet. Sales growth in 2009 is at the...

Read the article Ben Carson story and write a page about this story.

Andy Martinez is the CFO of Horizon Construction Company, He is weighing the advantages and disadvantages of raising funds via debt or equity. Which of the following is a true statement? Multiple...

Part:-2 Discussion Question: Please read Chapter 14 "Leadership: Styles and Behaviors" carefully and then give your answers on the basis of your understanding. 4. Before reading this chapter, which...

6. List one and only one societal role that you wish you had performed better in. Spend the next month on a small push to improve your personal performance within this role. At the end of the month,...

9. Imagine that you have achieved the goal you set for yourself in task 8. a. What do you see in the past? b. How do you feel? c. What do you hear? d. How does this change your roles? e. How does...

8. Set a goal that you really want to achieve in the near future, lets say 12 years. How does this goal fit in relation to the form roles and values above? What role and what value was it that...