Suppose Don's wants to invest to build a condominium tower in Moscow. If he can get his friend Vlad to buy one of the units, he figures the investment will be a success (because all Vlaď's rich friends will want to buy one too) and his income will be $1,000,000 this year. However, there is a 60% chance that Vlad will not be interested. In that case, the investment will fail and Don's income will be only $100,000. Don's utility function is U=In(income) The British insurance company Lloyds of London will insure the investment and they will charge him a premium of $600,000. Graph the risk situation described above. Note the expected utility. What would be the actuarially fair premium for a policy that would pay Don $900,000 in the event the investment fails? а. b с. What is Don's Risk Premium?

Suppose Don's wants to invest to build a condominium tower in Moscow. If he can get his friend Vlad to buy one of the units, he figures the investment will be a success (because all Vlaď's rich friends will want to buy one too) and his income will be $1,000,000 this year. However, there is a 60% chance that Vlad will not be interested. In that case, the investment will fail and Don's income will be only $100,000. Don's utility function is U=In(income) The British insurance company Lloyds of London will insure the investment and they will charge him a premium of $600,000. Graph the risk situation described above. Note the expected utility. What would be the actuarially fair premium for a policy that would pay Don $900,000 in the event the investment fails? а. b с. What is Don's Risk Premium?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.5P

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