Your wealth contains 10$ and 2 items: Item 1 is worth 10$ while item 2 is...

 

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Your wealth contains 10$ and 2 items: Item 1 is worth 10$ while item 2 is worth 20$. The probability for item 1 to be lost is 10% and the probability for item 2 to be lost is also 10%. Therefore, you would like to purchase an insurance against these possibilities. Your utility function is defined by u (x) = In x and you are expected to be a utility maximizer. Compute in each case the maximum premium you want to pay for getting a full insurance (this means that you are fully compensated if you lose one or two items). a) Both events "Item 1 is lost" and "Item 2 is lost" are unrelated random events. b) The two events are perfectly correlated. Your wealth contains 10$ and 2 items: Item 1 is worth 10$ while item 2 is worth 20$. The probability for item 1 to be lost is 10% and the probability for item 2 to be lost is also 10%. Therefore, you would like to purchase an insurance against these possibilities. Your utility function is defined by u (x) = In x and you are expected to be a utility maximizer. Compute in each case the maximum premium you want to pay for getting a full insurance (this means that you are fully compensated if you lose one or two items). a) Both events "Item 1 is lost" and "Item 2 is lost" are unrelated random events. b) The two events are perfectly correlated.

Answer rating: 100% (QA)

a Both events Item 1 is lost and Item 2 is lost are unrelated random events To compute the maximum p... View the full answer