Question: You are a risk-averse decision maker with a utility function U(I) = 1-3200I-2, where I denotes your income expressed in thousands. Your income is $100,000

You are a risk-averse decision maker with a utility function U(I) = 1-3200I-2, where I denotes your income expressed in thousands. Your income is $100,000 (thus, I =100). However, there is a 0.2 chance that you will have an accident that results in a loss of $20,000. Now, suppose you have the opportunity to purchase an insurance policy that fully insures you against this loss (i.e., that pays you $20,000 in the event that you incur the loss). What is the highest premium that you would be willing to pay for this insurance policy?

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If you do not buy insurance your expected utility is 021 3200100 ... View full answer

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