MICROECONOMICS
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ISBN: 9780134519494
Author: Acemoglu
Publisher: PEARSON
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Chapter 15, Problem 5P
To determine
Consequences of using
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Loss aversion refers to the idea that people ________.
generally tend to avoid risky activities
are more prone to making losses than gains in day-to-day transactions
psychologically weight a loss more heavily than they psychologically weight a gain
are unwilling to undertake expenditures that reduce the probability of future losses
. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = square root x. There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000.
a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain.
b) What would be the highest price (premium) that she would be willing to pay for an insurance policy that fully insures her against the flooding damage?
Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = square root x . There is a 1 % probability that there is flooding damage at her house. The repair of the damage would cost £80,000 which would reduce the income to £10,000.
a) Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain
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