Q2. Bob's wealth is $2500. However, he faces a 50% chance of suffering a $900 loss. His utility function is U(w) = √w, Where w is his wealth. a) What is Bob's expected utility? b) What is Bob's cost of risk? c) What is the fair premium an insurer should charge for a full insurance? d) If the insurer set the premium to $500 for a full insurance, will Bob buy it? e) What is the maximum amount Bob would be willing to pay for a full insurance?
Q2. Bob's wealth is $2500. However, he faces a 50% chance of suffering a $900 loss. His utility function is U(w) = √w, Where w is his wealth. a) What is Bob's expected utility? b) What is Bob's cost of risk? c) What is the fair premium an insurer should charge for a full insurance? d) If the insurer set the premium to $500 for a full insurance, will Bob buy it? e) What is the maximum amount Bob would be willing to pay for a full insurance?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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![Q2. Bob's wealth is $2500. However, he faces a 50% chance of suffering a $900 loss. His
utility function is U(w) = √w, Where w is his wealth.
a) What is Bob's expected utility?
b) What is Bob's cost of risk?
c) What is the fair premium an insurer should charge for a full insurance?
d) If the insurer set the premium to $500 for a full insurance, will Bob buy it?
e) What is the maximum amount Bob would be willing to pay for a full insurance?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe3096e0d-b32c-4af3-8ce1-f1c3986360c5%2F776a974c-7a78-43a2-b4fe-703bbc962a4b%2Fn2c0tsp_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Q2. Bob's wealth is $2500. However, he faces a 50% chance of suffering a $900 loss. His
utility function is U(w) = √w, Where w is his wealth.
a) What is Bob's expected utility?
b) What is Bob's cost of risk?
c) What is the fair premium an insurer should charge for a full insurance?
d) If the insurer set the premium to $500 for a full insurance, will Bob buy it?
e) What is the maximum amount Bob would be willing to pay for a full insurance?
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