Question

Suppose that a decision maker’s risk attitude toward monetary gains or losses x given by the utility function U(x) = (x + 10000)^0.5. If there is a 5% chance that the decision maker's car, valued at $8000, will be totaled during the next year, what is the most that she would be willing to pay each year for an insurance policy that completely covers the potential loss of her vehicle? Please round all answers (also intermediate results to 2 decimals)

	a.	544.38
	b.	274.10
	c.	99.27
	d.	145.47

Answer 1

Po Noro each covers the Answere The most that she would be willing to pay year for an insurance policy that completely Potential loss of her vehicle: E-U= 0.95 xu (0) +009 XU(-8000) -0.95 x{0+10000306+008 (-8000 +10000) 05 +22360 =97.9360 -97 2360 (x +10000 10:15 Here, By squaring the both sider. * +10000.- (97-236) 2 X + 10000 =9454.8396 X = 9454.8296 -10000 * 3-64546. (approximately). Since the loss become $545.16, she should be paying insurance premium of $ 545.16 in each year. is correct a a544.38