Jill possesses $160,000 worth of valuables. She faces a 0.02 probability of a burglary, where she would lose jewelry worth $70,000. Her utility function is U = 4X¹/2, where X is final worth in dollars. Show your work for each part below. a. Calculate AND interpret Jill's risk premium. b. What is the most that Jill would be willing to pay for an insurance policy that fully covers her against loss? c. What is the most that Jill would have to pay for fair insurance: a contract between an insurer and a policyholder in which the expected value of the contract to the policyholder is zero. You can learn more about "actuarially fair insurance" by watching this video.

Jill possesses $160,000 worth of valuables. She faces a 0.02 probability of a burglary, where she would lose jewelry worth $70,000. Her utility function is U = 4X¹/2, where X is final worth in dollars. Show your work for each part below. a. Calculate AND interpret Jill's risk premium. b. What is the most that Jill would be willing to pay for an insurance policy that fully covers her against loss? c. What is the most that Jill would have to pay for fair insurance: a contract between an insurer and a policyholder in which the expected value of the contract to the policyholder is zero. You can learn more about "actuarially fair insurance" by watching this video.

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter9: The Basic Tools Of Finance

Section: Chapter Questions

Problem 9PA

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