6 (A) Sudesh invests in the business which will give him a return of 64 if it turns out to be successful, and Rs. 36 if it is a failure. The probability of failure is 2/3 and that of success is 1/3. The utility function derived from the wealth from this business is given by u(w) = w². Suppose the insurance company offers to insure Sudesh against low earnings. The price of the insurance is 75 paisa for each rupee of benefit. How much of the insurance will she buy to maximize his utility?

6 (A) Sudesh invests in the business which will give him a return of 64 if it turns out to be successful, and Rs. 36 if it is a failure. The probability of failure is 2/3 and that of success is 1/3. The utility function derived from the wealth from this business is given by u(w) = w². Suppose the insurance company offers to insure Sudesh against low earnings. The price of the insurance is 75 paisa for each rupee of benefit. How much of the insurance will she buy to maximize his utility?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.3P

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