You are risk averse, and youre utility is given by U(W) = W (i.e W 0.5) ),
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Question:
You are risk averse, and youre utility is given by U(W) = W (i.e W0.5) ), where W is your wealth, which is currently $200,00. You are considering buying car insurance.
a. If there is a 2% chance of crashing, and incurring costs of $30,000 (to replace the car, compensate the victims, and the like), how much would actuarially fair insurance cost?
b. Compute your expected utility with, and without, this insurance (which you can buy at an actuarially fair price). Would you buy this insurance? Explain
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