Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = √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?
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- . 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 . 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.5. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = √√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) √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.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? ExplainZac has a current wealth of £400. He gets an email offering him the chance to enter a prize draw that gives £500 prize with a 25% chance and £0 the rest of the time. Zac is an expected utility maximiser with a von Neumann-Morgenstern utility in wealth w of u (w) = Vw. What is the minimum price at which Zac will sell his rights to enter the draw? £106.25 £506.25 O E31.25 £22.5 £56.25
- 5. Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index u(x) = √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. I Would Priyanka be willing to spend £500 to purchase an insurance policy that would fully insure her against this loss? Explain. 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?Utility Theory You live in an area that has a possibility of incurring a massive earthquake, so you are considering buyingearthquake insurance on your home at an annual cost of $180. The probability of an earthquake damagingyour home during one year is 0.001. If this happens, you estimate that the cost of the damage (fully coveredby earthquake insurance) will be $160,000. Your total assets (including your home) are worth $250,000. A. Apply Bayes’ decision rule to determine which alternative (take the insurance or not) maximizes yourexpected assets after one year.Amy likes to go fast in her new Mustang GT. Their utility function over wealth is v(w) where w is wealth. If Amy goes fast she gets an increase in utility equal to F. But when Amy drives fast, she is more likely to crash: when she drives fast the probability of a crash is 10%, but when she obeys the speed limit, the probability of a crash is only 5%. Amy's car is worth $2000 unless she crashes, in which case it is worth $0. If Amy doesn't have insurance, driving fast isn't worth the risk, so she will alway obey the speed limit. If Amy is offered an insurance contract with full insurance for a premium P with the deductible D, which of the inequalites below is her incentive compatibility constraint that makes sure that she will still obey the speed limit even when she is fully insured? 0.05U(2000 – P – D) + 0.95U(2000 – P) > 0.05U(0 – P – D + 2000) + 0.95U(2000 – P) 0.05U(2000 – P – D) + 0.95U(2000 – P) > 0.1(U(2000 – P – D) + F) + 0.90(U(2000 – P) + F) 0.05U(2000 – P – D) + 0.95U(2000)…
- 2. Alice believes that her car would cost £12500 to replace if it was stolen or damaged. Based on crime statistics for the area she lives in, she believes that the probability of her car being stolen or damaged is 0.15. (i) Alice's utility function is given by U(w) = ln(w) for w > 0 and she as £35000 in the bank. Calculate how much Alice would be prepared to pay (in a single payment) to insure her car against theft or damage (ii) Repeat the calculation in the previous part but now assume Alice has £500000 in the bank.could you answer part b to this question or if you have time part a and part b but part is more important. thank you Priyanka has an income of £90,000 and is a von Neumann-Morgenstern expected utility maximiser with von Neumann-Morgenstern utility index . 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?Johnny owns a house that is worth $100,000. There is a O.1% chance that the house will be completely destroyed by fire, leaving Johnny with $0. Johnny's utility function is u(x) = vx, where x represents final wealth. Assuming that Johnny has no other wealth, what's the maximum amount that he would be willing to pay for an insurance policy that completely replaces his house if destroyed by fire? Make sure to answer with the dollar sign and then the number, i.e. $532.17. Be accurate up to the second decimal. You should not need to round. Hint: The hundredths place should be 0. Enter your answer here