ch the individual would be willing to pay for a full car insurance, i.e., where the indemnity is equal to the value of the car? eutral insurance company is willing to insure the car at the premium of a = £2/3 for every one of coverage.

Algebra & Trigonometry with Analytic Geometry
13th Edition
ISBN:9781133382119
Author:Swokowski
Publisher:Swokowski
Chapter5: Inverse, Exponential, And Logarithmic Functions
Section5.6: Exponential And Logarithmic Equations
Problem 52E
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An expected utility maximiser owns a car worth £60 000 and has a bank account with £20 000. The money in the bank is safe, but there is a 50%
probability that the car will be stolen. The utility of wealth for the agent is u(y) = In(3) and they have no other assets.
How much the individual would be willing to pay for a full car insurance, i.e., where the indemnity is equal to the value of the car?
A risk-neutral insurance company is willing to insure the car at the premium of = £2/3 for every one
pound of coverage.
How much insurance coverage will the individual choose to buy?
How much profits, in expectation, does the insurance company earn on insuring the individual?
Transcribed Image Text:An expected utility maximiser owns a car worth £60 000 and has a bank account with £20 000. The money in the bank is safe, but there is a 50% probability that the car will be stolen. The utility of wealth for the agent is u(y) = In(3) and they have no other assets. How much the individual would be willing to pay for a full car insurance, i.e., where the indemnity is equal to the value of the car? A risk-neutral insurance company is willing to insure the car at the premium of = £2/3 for every one pound of coverage. How much insurance coverage will the individual choose to buy? How much profits, in expectation, does the insurance company earn on insuring the individual?
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