Homework Help Question & Answers

4) A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his...

4) A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth within the next year. a.

4) A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth within the next year. a. (5) What is the consumer's expected wealth one year from now? b. (5) An insurance company offers our consumer full insurance against the possible loss. What premium must the consumer be charged for the insurance company to expect to break even? Explain. c. (5) Suppose our risk-averse consumer is indifferent between getting $85,000 wealth with certainty and facing the above described uncertain situation. What is the maximum premium that the insurance company will be able to charge this consumer for its full insurance policy? Explain.
0 0
Next > < Previous
ReportAnswer #1

a) expected wealth = 100,000*.9 + .1*50,000

= 95,000

b) premium= loss*loss Probability

= 50,000*.1

= 5,000

C) U (85,000) = EU

So Maximum Premium = initial wealth - certainty equivalent

= 100,000-85,000

= $ 15,000

Know the answer?
Add Answer of:
4) A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his...
Your Answer: Your Name: What's your source?
Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth...

    A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth within the next year. a. (5) What is the consumer's expected wealth one year from now? b. (5) An insurance company offers our consumer full insurance against the possible loss. What premium must the consumer be charged for the insurance company to expect to break even? Explain. c. (5) Suppose our risk-averse consumer is indifferent between getting $85,000 wealth with certainty and facing the...

  • 4) A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his...

    4) A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth within the next year. a. (5) What is the consumer's expected wealth one year from now? b. (5) An insurance company offers our consumer full insurance against the possible loss. What premium must the consumer be charged for the insurance company to expect to break even? Explain. c. (5) Suppose our risk-averse consumer is indifferent between getting $85,000 wealth with certainty and facing...

  • 4) A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his...

    4) A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth within the next year. a. (5) What is the consumer's expected wealth one year from now? b. (5) An insurance company offers our consumer full insurance against the possible loss. What premium must the consumer be charged for the insurance company to expect to break even? Explain. c. (5) Suppose our risk-averse consumer is indifferent between getting $85,000 wealth with certainty and facing...

  • 4) A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his...

    4) A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth within the next year. a. (5) What is the consumer's expected wealth one year from now? b. (5) An insurance company offers our consumer full insurance against the possible loss. What premium must the consumer be charged for the insurance company to expect to break even? Explain. c. (5) Suppose our risk-averse consumer is indifferent between getting $85,000 wealth with certainty and facing...

  • A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth...

    A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth within the next year. a. (5) What is the consumer’s expected wealth one year from now? b. (5) An insurance company offers our consumer full insurance against the possible loss. What premium must the consumer be charged for the insurance company to expect to break even? Explain. c. (5) Suppose our risk-averse consumer is indifferent between getting $85,000 wealth with certainty and facing the...

  • A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth...

    A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth within the next year. a. (5) What is the consumer’s expected wealth one year from now? b. (5) An insurance company offers our consumer full insurance against the possible loss. What premium must the consumer be charged for the insurance company to expect to break even? Explain. c. (5) Suppose our risk-averse consumer is indifferent between getting $85,000 wealth with certainty and facing the...

  • A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth...

    A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth within the next year. a. What is the consumer’s expected wealth one year from now? b. An insurance company offers our consumer full insurance against the possible loss. What premium must the consumer be charged for the insurance company to expect to break even? Explain. c. Suppose our risk-averse consumer is indifferent between getting $85,000 wealth with certainty and facing the above described uncertain...

  • 4) A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his...

    4) A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth within the next year. a. (5) What is the consumer’s expected wealth one year from now? b. (5) An insurance company offers our consumer full insurance against the possible loss. What premium must the consumer be charged for the insurance company to expect to break even? Explain. c. (5) Suppose our risk-averse consumer is indifferent between getting $85,000 wealth with certainty and facing...

  • 4) A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his...

    4) A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth within the next year. a. (5) What is the consumer’s expected wealth one year from now? b. (5) An insurance company offers our consumer full insurance against the possible loss. What premium must the consumer be charged for the insurance company to expect to break even? Explain. c. (5) Suppose our risk-averse consumer is indifferent between getting $85,000 wealth with certainty and facing...

  • NEED HELP!!!!!PLZ! 4) A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half...

    NEED HELP!!!!!PLZ! 4) A risk-averse consumer with $100,000 in wealth faces 0.1 probability of losing half of his wealth within the next year. a. (5) What is the consumer's expected wealth one year from now? b. (5) An insurance company offers our consumer full insurance against the possible loss. What premium must the consumer be charged for the insurance company to expect to break even? Explain. c. (5) Suppose our risk-averse consumer is indifferent between getting $85,000 wealth with certainty...

Free Homework App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
Share Your Knowledge

Post an Article
Post an Answer
Post a Question with Answer

Self-promotion: Authors have the chance of a link back to their own personal blogs or social media profile pages.