Consider a consumer who is deciding to buy insurance for his beachfront house. Suppose the probability that the house will get damaged by the rising sea level is 0.4. Let us assume that the valuation of the house is 100 (in thousand dollars) and in case of a natural calamity due to rising sea level, the valuation of the house would become 40. At the price of insurance of $0.5, what would the optimal level of insurance bought by the consumer if his vNM utility function is given by u(x) = In x? [Answer up to two decimal points.] Answer:

Consider a consumer who is deciding to buy insurance for his beachfront house. Suppose the probability that the house will get damaged by the rising sea level is 0.4. Let us assume that the valuation of the house is 100 (in thousand dollars) and in case of a natural calamity due to rising sea level, the valuation of the house would become 40. At the price of insurance of $0.5, what would the optimal level of insurance bought by the consumer if his vNM utility function is given by u(x) = In x? [Answer up to two decimal points.] Answer:

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter18: Asymmetric Information

Section: Chapter Questions

Problem 18.5P

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