Q3) Suppose an individual is facing an uncertain situation with the following information: o Initial wealth = 200 o Prob. Of loss = 50% o Loss if accident occurs = 100 o Price of insurance policy = $Z a. What are the lotteries with and without insurance? b. Find the fair price of the insurance policy. c. If u(w)= W0.5, How much would this person be willing to pay for the policy? What can you say about her risk attitude?
Added by Frederick A.
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The probability that a property will not be damaged in the next period is 0.75. The probability density function of a positive loss is given by f(x) = 0.25(0.01e^(-0.01x)) for x > 0. The owner of the property has a utility function given by u(w) = -e^(-0.005w). a) Calculate the expected loss b) Find the maximum insurance premium the property owner will pay for complete insurance c) Find the maximum insurance premium the property owner will pay if he is to purchase an insurance that pays 1/2 of any losses during the next period
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