Question: Problem #2 Mr. X's car is worth 10 000 zloty and it is the only material wealth that he posesses….

01 May Question: Problem #2 Mr. X’s car is worth 10 000 zloty and it is the only material wealth that he posesses….

Posted at 18:24h in 2Past Paper by Exams

Problem #2 Mr. X’s car is worth 10 000 zloty and it is the only material wealth that he posesses. X faces the risk of his car being stolen with the probability of 19/83 per year. His utility function depending on wealth is u-x12. Additionally, X derives the utility of 190/83 from parking regularly next to a sleazy bar, what however doubles the yearly risk of his car being stolen. Would X be willing to buy full insurance against theft in the competitive insurance market? Demonstrate that insurance with X’s own participation at the level of 1700 is optimal. (Assume that monitoring where X parks or finding where his car was stolen is too costly and ignore all costs of insurance except for the expected compensation level).

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Question: Problem #2 Mr. X’s car is worth 10 000 zloty and it is the only material wealth that he posesses….