1. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,00 A. Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. B. What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?

1. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,00 A. Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. B. What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter19: The Basic Tools Of Finance

Section19.2: Managing Risk

Problem 2QQ

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5. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = √x. There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. I Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?
5. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = √√x. There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. b) What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?
. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain.
. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = square root x. There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. b) What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?
35. Your current disposable income is $10,000. There is a 10% chance you will get in a serious car accident, incurring damage of $1,900. (There is a 90% chance that nothing will happen.) Your utility function is U = √√T, where I is income. If this policy is priced at $40, what is the change in your expected utility if you purchase the policy rather than no insurance? b) 0.8 c) 0.2 d) 0
3. Sarah's current disposable income is £90,000. Suppose there's a 1% chance that Sarah's house may be flooded, and if it is, the cost of repairing it will be £80,000, reducing her disposable income to £10,000. Suppose also that her utility function of income M is: U = VM (a)Calculate Sarah's expected income and expected utility given the risk of flooding. (b)For her to take an insurance that fully insures her in the event of house flooding, Sarah would have to pay a price for such an insurance, which would reduce her disposable income. What would be the minimum certain disposable income required for Sarah to take an insurance that fully insures her in the event of house flooding? Explain your answer.
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. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) √x . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000. a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain.
4) Luke is planning an around-the-world trip on which he plans to spend $10,000. The utility from the trip is a function of how much she spends on it (Y ), given by U(Y) = InY a). If there is a 25 percent probability that Luke will lose $1000 of his cash on the trip, what is the trip's expected utility. b). Suppose that Luke can buy insurance to fully against losing the $1,000 with a actuarially fair insurance. What is his expected utility if he purchase this insurance. Will he purchase the insurance? c). Now suppose utility function is U(Y) = Y/1000 What is his expected utility if he purchase the insurance in b). Will he purchase the insurance?
Yuri owns just one ship, he calls it Previt. The ship is worth $25 million dollars. If the ship sinks, Yuri loses $25 million. The probability that it will sink is .02. Yuri's total wealth, including the value of the ship is $50 million. He is an expected utility maximizer with utility U(W) equal to W?. What is the maximum amount that Yuri would be willing to pay in order to be fully insured against the risk of losing his ship? a. $4 million b. $ 1.96 million c. $ 0.39 million d. $ 3.9 million e. $ 5.96 million f. None of the above, the right answer is:
In the summer of 1984, Nicholai opened a small art gallery in the West Village and amassed a collection worth $2,60,000. An insurance company figured there was a 5% chance the collection would be destroyed and worth $0. Nicholai has utility u(x) = x0.5. If Nicholai purchases full insurance at a fair price, his expected utility would be ___. while if he declines the insurance he would face an expected utility of а. 1,487.5; 1,531.8 b. 1,487.5; 1,444.9 с. 1,571.6;B 1,531.8 d. 1,571.6; 1,444.9