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?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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