Q4) a) expected wealth in a year from now = .9*100,000 + .1*50000
= 90,000+5,000
= 95,000
B) in full insurance, entire loss in bad state is compensated , so benefit received from insurance company = 50,000
When firm breaks even, it's expected loss when it reimburses for loss equals expected gain in good state, when no need to pay to the insured side .
So then, premium charged = loss*loss Probability
= 50,000*.1
= $ 5000
C)
Maximum possible Premium = initial wealth owned - the certainty equivalent of risky situation
= 100,000 - 85,000
= $ 15,000
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