Monty Burns, the owner of the Springfield Nuclear Power Plant, owns many real estate properties. His last acquisition is a house worth €1,000, 000. Monty Burns considers purchasing an insurance for this new property. With probability 0.1, he will face damage reducing his property' value to €640, 000 while with probability 0.9 his property will not be damaged and thus will remain at its current value. Burns' vNM utility for wealth is given by u°(w) = Vw. Miss b runs an insurance company in Springfield and is willing to insure Monty Burns. The insurance contract says the following: if Burns' new property is damaged, she will pay an amount q (the coverage) to Monty Burns in exchange for a payment r (the premium) that is due independently from the occurence of the damage. Miss b's vNM utility over her income y is u'(y) = y.

Monty Burns, the owner of the Springfield Nuclear Power Plant, owns many real estate properties. His last acquisition is a house worth €1,000, 000. Monty Burns considers purchasing an insurance for this new property. With probability 0.1, he will face damage reducing his property' value to €640, 000 while with probability 0.9 his property will not be damaged and thus will remain at its current value. Burns' vNM utility for wealth is given by u°(w) = Vw. Miss b runs an insurance company in Springfield and is willing to insure Monty Burns. The insurance contract says the following: if Burns' new property is damaged, she will pay an amount q (the coverage) to Monty Burns in exchange for a payment r (the premium) that is due independently from the occurence of the damage. Miss b's vNM utility over her income y is u'(y) = y.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.7P

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