Posted by **Kevin** on Thursday, February 15, 2007 at 7:39pm.

(Insurance) Let X = R+. Consider a house owner whose house has a risk of

burning down with probability 0.001. If the house burns down it is worth

$0 otherwise it is worth $1 million. The owner of the house is an expected utility maximizer with a vNM utility function u(x) = x^(1/2) over final wealth. Suppose now that there is an insurance company who may sell full insurance to this agent at a premium p. The contract is of the form: If the agent pays $p million then the

insurance company will pay the agent $1 million in case his house burns down. The insurance company does not pay back the p later, whether the house burns down or not.

(a) How do you describe the risk attitudes of the house owner?

(b) For which values of p, would the owner of the house be willing to buy the insurance?

(c) If the insurance company maximizes expected profits and knows (b), what

premium p* would it set? What are the company’s expected profits?

## Answer This Question

## Related Questions

- Expected Utility-Econ - Suppose that your wealth is $250,000. You buy a $200,000...
- math - if the insurance paid on the contents of a house is 33.60 pounds, at the ...
- math - if the insurance paid on the contents of a house is 33.60 pounds, at the ...
- math word problem - The owner of a rental house can depreciate its value over a ...
- math - The Rental Depreciation Problem. The owner of a rental house can ...
- Math156 - I can understand in my head how to solve it I can't figure it out on ...
- Trig - House B is located at a bearing of N67°E from house A. House C is 370 ...
- calculus - The three pigls are building their houses while the brik=ck house ...
- ENGINEERING ECONOMY - A man bought a house and a lot worth P300000. The annual ...
- English - 1. The wolf climbed Ted's house and came down through the chimney. He ...

More Related Questions