An expected utility maximiser owns a car worth £60000£60000 and has a bank account with £20000£20000. The money in the bank is safe, but there is a 50%50% probability that the car will be stolen. The utility of wealth for the agent is u(y)=ln(y)u(y)=ln⁡(y) and they have no other assets. A risk-neutral insurance company is willing to insure the car at the premium of π=£2/3π=£2/3 for every one pound of coverage. How much insurance coverage will the individual choose to buy? a. £30,000 b.£40,000

An expected utility maximiser owns a car worth £60000£60000 and has a bank account with £20000£20000. The money in the bank is safe, but there is a 50%50% probability that the car will be stolen. The utility of wealth for the agent is u(y)=ln(y)u(y)=ln⁡(y) and they have no other assets. A risk-neutral insurance company is willing to insure the car at the premium of π=£2/3π=£2/3 for every one pound of coverage. How much insurance coverage will the individual choose to buy? a. £30,000 b.£40,000

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.1P

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