Setup from Question 1) An expected utility maximiser owns a car worth £60 000 and has a bank account with £20 000. The money in the bank is safe, but there is a 50% probability that the car will be stolen. The utility of wealth for the agent is u(y) = In(y) and they have no other assets.Question 2) Consider the setup from Question 1. A risk-neutral insurance company is willing to insure the car at the premium of a = £2/3 for every onepound of coverage.How much insurance coverage will the individual choose to buy?O a. £30000O b. £40 000O c.£80 000O d. £60 000

Answer 1 The person would be killing to pay the £ 20000 the reason for the same is that he has the…

Answered: Setup from Question 1) An expected…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Setup from Question 1) An expected utility maximiser owns a car worth £60 000 and has a bank account with £20 000. The money in the bank is safe, but there is a 50% probability that the car will be stolen. The utility of wealth for the agent is u(y) = In(y) and they have no other assets.

Question 2)

Consider the setup from Question 1. A risk-neutral insurance company is willing to insure the car at the premium of a = £2/3 for every one
pound of coverage.
How much insurance coverage will the individual choose to buy?
O a. £30000
O b. £40 000
O c.
£80 000
O d. £60 000

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