|
|
1. David just bought a new cell phone that costs $100. He is a busy academic and the probability of him losing the phone is 1/2. If he loses the phone, he will have to buy a new one. David is risk neutral. The company that sold him the phone is offering insurance. There are two insurance contracts. A full insurance contract looks like this: buying the contract costs $γ •100 and replaces the phone in case David loses the phone. A partial insurance contract costs $γ •50 and pays $50 in case the David loses the phone. For what values of γ would David want to buy the full insurance contract?
a) >1/2
b) <1/4
c) =1/2
d) None of the above
(Ans= c)
( Should it be that U( Buying full Insurance)>= U( Buying half insurance) or
U(Buying full Insurance)>= U(Not buying any insurance) or
something else)?
|
Locked
