William buys a car at $100,000, but if there is flood, his car will be worth...

 

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William buys a car at $100,000, but if there is flood, his car will be worth $20,000 only. He is risk averse and chooses to insure his car fully against floods at a fair premium of $4,000. His utility of consuming c is U(c) = √c and his income is $100,000. Let Cf denote his consumption in the case of a flood and cnf his consumption in the case of no flood. a. b. C. d. If the insurance price is fair and William insures fully, what is the probability of flood? Explain. Find William's von-Neumann-Morgenstern utility function and budget constraint. Calculate William's optimal state-contingent consumption bundle. Explain your answer. Explain graphically the information in (b) and (c) that imply risk aversion. ( William buys a car at $100,000, but if there is flood, his car will be worth $20,000 only. He is risk averse and chooses to insure his car fully against floods at a fair premium of $4,000. His utility of consuming c is U(c) = √c and his income is $100,000. Let Cf denote his consumption in the case of a flood and cnf his consumption in the case of no flood. a. b. C. d. If the insurance price is fair and William insures fully, what is the probability of flood? Explain. Find William's von-Neumann-Morgenstern utility function and budget constraint. Calculate William's optimal state-contingent consumption bundle. Explain your answer. Explain graphically the information in (b) and (c) that imply risk aversion. (

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Utility w 5e where e 1 when he drive safely 0 for drive aggressive... View the full answer