↑ Conside following FIRE EVENT FIRE → NO FIRE PROBABILITY 0.02 0.98 NCE PROBLEM Where fire destroys a OUTCOME 100 300 INSURANCE PAYOUT 200 0 thousand) house. INSURANCE PREMIUM 10 10 (a) What do we mean when we say an agent is Risk Averse? (b) Assume utility is U(x) = √(x). What is the expected payoff and expected utility of having no insurance? Show your work. (c) Suppose the Insurance Premium was $10. Would this risk averse agent buy insurance? Show your wor and explain.

↑ Conside following FIRE EVENT FIRE → NO FIRE PROBABILITY 0.02 0.98 NCE PROBLEM Where fire destroys a OUTCOME 100 300 INSURANCE PAYOUT 200 0 thousand) house. INSURANCE PREMIUM 10 10 (a) What do we mean when we say an agent is Risk Averse? (b) Assume utility is U(x) = √(x). What is the expected payoff and expected utility of having no insurance? Show your work. (c) Suppose the Insurance Premium was $10. Would this risk averse agent buy insurance? Show your wor and explain.

Microeconomics

13th Edition

ISBN:9781337617406

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter1: What Economics Is About

Section1.3: Key Concepts In Economics

Problem 3ST

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