One of your clients is considering insuring himself against a possible damage (say this is a...

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One of your clients is considering insuring himself against a possible damage (say this is a house insurance). If nothing happens, there will be no damage. In a bad event, instead, the agent will lose £ 1000. The probability of the bad event is 0.1. Your client is risk averse. In particular, his preferences can be represented by the following utility function: u(c) = c1. His wealth is £ 100,000. a) An insurance company o§ers to insure him for a premium of £ 100. Would you advise your client to buy the insurance? b) Compute the maximum price your client should be willing to pay for such an insurance. One of your clients is considering insuring himself against a possible damage (say this is a house insurance). If nothing happens, there will be no damage. In a bad event, instead, the agent will lose £ 1000. The probability of the bad event is 0.1. Your client is risk averse. In particular, his preferences can be represented by the following utility function: u(c) = c1. His wealth is £ 100,000. a) An insurance company o§ers to insure him for a premium of £ 100. Would you advise your client to buy the insurance? b) Compute the maximum price your client should be willing to pay for such an insurance.

Answer rating: 100% (QA)

To advise the client on whether to buy the insurance we can use the concept of expected utility to c... View the full answer