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Suppose that consumers have utility function U(C) = log(C) where C is the consumption level and log is the natural logarithm. Consumers have initial consumption levels of 100 and are exposed to the following risk of loss: lose 10 with probability 0.4 and lose 5 with probability 0.6. They are considering buying insurance to cover these losses.  What is the certainty equivalent level of C when uninsured? (Hint: Find the consumption level C E such that U(C E ) equals the expected utility when uninsured.)

Suppose that consumers have utility function U(C) = log(C) where C is the consumption level and log is the natural logarithm. Consumers have initial consumption levels of 100 and are exposed to the following risk of loss: lose 10 with probability 0.4 and lose 5 with probability 0.6. They are considering buying insurance to cover these losses.  What is the certainty equivalent level of C when uninsured? (Hint: Find the consumption level C E such that U(C E ) equals the expected utility when uninsured.)

Essentials of Business Analytics (MindTap Course List)
Essentials of Business Analytics (MindTap Course List)
2nd Edition
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Chapter15: Decision Analysis
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Suppose that consumers have utility function U(C) = log(C) where C is the consumption level and log is the natural logarithm. Consumers have initial consumption
levels of 100 and are exposed to the following risk of loss: lose 10 with probability
0.4 and lose 5 with probability 0.6. They are considering buying insurance to cover
these losses. 

What is the certainty equivalent level of C when uninsured? (Hint: Find
the consumption level C
E
such that U(C
E
) equals the expected utility when
uninsured.)

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