Mike has the utility of wealth curve shown in the figure below.
He owns a car worth $20,000, and that is his only wealth. There is
a 10 percent chance that Mike will have an accident within a year.
If he does have an accident, his car is worthless.
(a) What is Mike's expected utility? (5
marks)
(b) What is the maximum amount that Mike is willing to pay for
auto insurance? (5 marks)
(c) Suppose all car owners are like Mike insofar as they have a
10 percent chance of having an accident. An insurance
company
agrees to pay each person who has an accident the full value of his
or her car. The
company's operating expenses are $1,000. What is
the minimum insurance premium that the
company is willing to
accept?
(d) Will Mike buy the
company's policy? Why or why not?
(5 marks)
- Mike Has The Utility Of Wealth Curve Shown In The Figure Below He Owns A Car Worth 20 000 And That Is His Only Wealth 1 (107.24 KiB) Viewed 52 times
Section A: Answer ALL THREE
questions 1. Mike has the utility of wealth curve shown in the figure below. He owns a car worth $20,000, and that is his only wealth. There is a 10 percent chance that Mike will have an accident within a year. If he does have an accident, his car is worthless. 9,00 Total utility (units) 80 60 40 20 0 4 8 12 16 20 Wealth (thousands of dollars) 1 (
Question 1 continued overleaf) EC1060 (a) What is Mike's expected utility? (5 marks) (b) What is the maximum amount that Mike is willing to pay for auto insurance? (5 marks) Suppose all car owners are like Mike insofar as they have a 10 percent chance of having an accident. An insurance
company agrees to pay each person who has an accident the full value of his or her car. The
company's operating expenses are $1,000. What is the minimum insurance premium that the
company is willing to accept? (5 marks) (d) Will Mike buy the
company's policy? Why or why not? (5 marks)