Question

Assume the only assets you own are $15,000 in savings in the bank and $25,000 Honda Accord. Over the next year, three bad things could happen to your car. 1. it is totaled. Probability 0.03 2. You have a major accident that requires $12,000 in repairs. Prob. = 0.07 3. You have a minor accident that requires $4,000 in repairs. Prob. = 0.2 If your wealth is x, your utility function is u(x) = ln(x+1). What is the most you should spend for insurance? the insurance will cover any replacement costs or repairs to the car and restore its value to $25,000. Ignore depreciation.

Answer 1