In the current housing market with decreasing house prices, you recently bought a house. Now you...

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In the current housing market with decreasing house prices, you recently bought a house. Now you are looking for a fire insurance contract. The damage caused by fire is the risk X you face and you decide to contact an insurer. Both you and this insurer assume an exponential distribution with parameter 1 for the risk X. a For the utility functions, both you and the insurer have exponential utility with parameters a, 0 < a < 1 and ã, 0 < ã < 1, respectively. The initial wealth equals w, and Wo, respectively. b. Under the assumptions described above and using the equilibrium equation from using expected utility, what would be the maximum premium P+ you are willing to pay to the insurer? c. Under the assumptions described above and using the equilibrium equation from using expected utility, determine the minimum premium P- the insurer wants to receive. d. Under what conditions on a, ã, up and Wo can the deal between you and the insurer be settled? Please interpret this condition. In the current housing market with decreasing house prices, you recently bought a house. Now you are looking for a fire insurance contract. The damage caused by fire is the risk X you face and you decide to contact an insurer. Both you and this insurer assume an exponential distribution with parameter 1 for the risk X. a For the utility functions, both you and the insurer have exponential utility with parameters a, 0 < a < 1 and ã, 0 < ã < 1, respectively. The initial wealth equals w, and Wo, respectively. b. Under the assumptions described above and using the equilibrium equation from using expected utility, what would be the maximum premium P+ you are willing to pay to the insurer? c. Under the assumptions described above and using the equilibrium equation from using expected utility, determine the minimum premium P- the insurer wants to receive. d. Under what conditions on a, ã, up and Wo can the deal between you and the insurer be settled? Please interpret this condition.

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a For the utility functions both you and the insurer have exponential utility wit... View the full answer