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Socrates owns just one ship. The ship is worth $200 million dollars. If the ship sinks,
Socrates loses $200 million. The probability that it will sink is .02. Socrates' total wealth, including the value of the ship is $225 million. He is an expected utility maximizer with utility U(W) equal to the square root of W. What is the maximum amount that Socrates would be willing to pay in order to be fully insured against the risk of losing his ship?

  • Economics - ,

    Take a shot, what do you think?

    Hint: Assuming the guy is risk-neutral, calculate an insurance value Z such that 225-Z = expected wealth without insurance.

  • Economics - ,


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