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

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?

This problem has been solved!


Do you need an answer to a question different from the above? Ask your question!
Related Book For answer-question

Microeconomics

2nd edition

Authors: Douglas Bernheim, Michael Whinston

ISBN: 978-0073375854