problem code : 140609MICRO

Posted by vishruti on Jun 14, 2009; 2:00pm
URL: http://discussion-forum.276.s1.nabble.com/problem-code-140609MICRO-tp3075741.html

Consider a strictly risk averse decision maker who has an initial wealth of W but who runs a risk of loos of Rs. D. The probability of loss is "p". It is possible for the agent to buy insurance.One unit of insurance costs Rs. q and pays Re. 1 if loss occurs. If x units of insurance are bought then what is the wealth of the individual if no loss occurs? What is the wealth if loss occurs? Also find the expected wealth. What is the optimal level of x if U(W) = W ? Is the insurance fair?

(source: mas collel)