15.18 You are a risk-averse decision maker with a util- ity function U(I) = 1 - 3,2001-2, 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?
15.18 You are a risk-averse decision maker with a util- ity function U(I) = 1 - 3,2001-2, 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?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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bottom is the question, top is a part to the solution one of he chegg tutors wrote down. In WHAT WORLD does 100/1000=0.01 IT DOESN'T. 100/1000 = 0.1 to the power of -2 is 100 NOT 1000 so CAN SOMEONE PLEASE PLEASE correctly solve this. This is my third time posting it like jesssusssss
Transcribed Image Text:Calculate the utility if there is no accident:
U(I) = 1 - 3200 * (100/1000)^(-2)
U(I) = 1 - 3200 * 0.01^(-2)
U(I) = 1 - 3200 * 10000
U(I) = 1 - 3200 * 10000
U(I) = 1 - 32
Transcribed Image Text:15.18 You are a risk-averse decision maker with a util-
ity function U(I) = 1 - 3,2001-², 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
be willing to pay for this insurance policy?
you would
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