You are pondering whether to buy insurance for your new car. The car is worth $50,000. Apart from that, your wealth sums up to $40,000. Your utility takes the form u(w) = √w. There is 0.5% chance that your car will be stolen. With the insurance in place, you will get fully reimbursed if this tragedy happens. (a) If the insurance premium is $400, would you buy the insurance? (b) What is the largest premium you are willing to pay for the car insurance? (c) If your utility is instead given by u(w) = log(w), how does your answer to part (2) change?

You are pondering whether to buy insurance for your new car. The car is worth $50,000. Apart from that, your wealth sums up to $40,000. Your utility takes the form u(w) = √w. There is 0.5% chance that your car will be stolen. With the insurance in place, you will get fully reimbursed if this tragedy happens. (a) If the insurance premium is $400, would you buy the insurance? (b) What is the largest premium you are willing to pay for the car insurance? (c) If your utility is instead given by u(w) = log(w), how does your answer to part (2) change?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.5P

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