The worth of consumer's house is 160, and her utility function is u(w) = √w. The probability of outbreak of fire is p = 1/2, and the fire will make 120 amount of loss of worth of house. Under the given conditions, consumer can join insurance that pay insurance money as B by pay insurance fee qB. (a) Find the amount of insurance that consumer will join. (b) Derive the condition that consumer will not join insurance. (c) Derive the condition that make consumer join full insurance. (d) Find the B, when the q is given as q = 3/5

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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The worth of consumer's house is 160, and her utility function is u(w) = √w. The probability
of outbreak of fire is p = 1/2, and the fire will make 120 amount of loss of worth of house.
Under the given conditions, consumer can join insurance that pay insurance money as B by
pay insurance fee qB.
(a) Find the amount of insurance that consumer will join.
(b) Derive the condition that consumer will not join insurance.
(c) Derive the condition that make consumer join full insurance.
(d) Find the B, when the q is given as q = 3/5
Transcribed Image Text:The worth of consumer's house is 160, and her utility function is u(w) = √w. The probability of outbreak of fire is p = 1/2, and the fire will make 120 amount of loss of worth of house. Under the given conditions, consumer can join insurance that pay insurance money as B by pay insurance fee qB. (a) Find the amount of insurance that consumer will join. (b) Derive the condition that consumer will not join insurance. (c) Derive the condition that make consumer join full insurance. (d) Find the B, when the q is given as q = 3/5
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