B2. [10 points] Actuarially fair insurance Ann is a risk averse individual with the utility function u(w) = w0.5. Her cu

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B2 10 Points Actuarially Fair Insurance Ann Is A Risk Averse Individual With The Utility Function U W W0 5 Her Cu 1 (498.81 KiB) Viewed 42 times

B2. [10 points] Actuarially fair insurance Ann is a risk averse individual with the utility function u(w) = w0.5. Her current wealth is $300 and with the probability 0.25 she will incur a huge loss of D = $240, but with the probability 0.75 she will incur no loss. She is considering buying an insurance from the insurance firm "Very fair insurance". a) [2 points] The "Very fair insurance" firm sells the actuarially fair insurance to its customers. What premium would they charge Ann per dollar of insurance? b) [2 points] What is Ann's expected wealth if she insures for the amount I? How does it depend on I? c) [6 points] How much insurance is she going to buy? Is she fully insured? Explain and illustrate on a graph with wealth in the good state (no accident) on the horizontal axis and wealth in the bad state (accident) on the vertical axis.