Question

Harry is risk averse, with utility of wealth U(W) W2. His future wealth is random, due to the probability of 0.20 percent that he will have an accident which would reduce his wealth to $10,000. If he does not have an accident, his wealth will be $250,000. Harrys expected utility of future wealth without insurance against loss equals: a) 199.80 19. b) 288.60 c) 368.40 d) 499.20 e) None of the above are correct. The maximum premium Harry will pay for insurance against loss due to this accident is: a) 725.65 20. b) 799.36 c) 824.78 d) 898.64 e) None of the above are correct. 21. Not counting transactions costs of writing and managing the insurance contract the maximum profit an insurance company could earn from insuring Harry against this loss is: a) 245.65 b) 292.85 c) 344.78 d) 408.96 e) None of the above are correct

The answers are

19. D

20. B

21. E

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