Adam has wealth of $40,000 as long as his business does not burn down. However, there...

Adam has wealth of $40,000 as long as his business does not burn down. However, there is a 30% probability that his business will burn down, causing a loss of $30,000 and leaving him with $10,000 of wealth. Adam's utility function is given by U = W^0.5 where W is wealth. Suppose Adam purchases insurance to cover the potential $30,000 loss. If the insurance premium is actuarially fair, Adam's utility with insurance is:

Solutions

Expert Solution

Solution:-

Actuarially fair premium (p) = probability of loss× loss in wealth

= 30% * 30000

= $9000

Utility with insurance = (W-p) ^ 0.5

= (40000 - 9000) ^0.5

= 31,0000.5

=176.09

Rahul Sunny answered 5 months ago

Next > < Previous

Related Solutions

Adam Smith is often called the father of economics. His famous book, The Wealth of Nations,...

Adam Smith is often called the father of economics. His famous book, The Wealth of Nations, talks about an “invisible hand” that automatically allocates goods to the persons best able to put them to good use. The invisible hand operates through the price mechanism for goods and services, so that individuals who trade on the market, while seeking only their own good, actually allocate society’s resources efficiently. Applied to modern capital markets, his ideas would imply that these markets would...

11. What does Adam Smith mean by wealth? Why is this so significant?

What does Adam Smith consider to be the main cause of the wealth of nations? Why...

What does Adam Smith consider to be the main cause of the wealth of nations? Why does this factor have such a powerful impact on wealth?

How did Adam Smith use the concept of "Invisible Hand" in his following works? (a)The wealth...

How did Adam Smith use the concept of "Invisible Hand" in his following works? (a)The wealth of Nations (b)The Theory of Moral Sentiments (c) The History of Astronomy.

Adam Smith, in his 1776 book The Wealth of Nations, essentially argued that free enterprise, regardless...

Adam Smith, in his 1776 book The Wealth of Nations, essentially argued that free enterprise, regardless of whether it is in the United States, Russia, or anywhere else in the world, encourages entrepreneurship because it permits an individual’s freedom to create and produce. Such a system makes it easier for entrepreneurs to acquire opportunity. Is this the same thing as saying that to be an entrepreneur is to be ethical? Why or why not?

According to Andrew Carnegie, in his essay "Wealth", where does inequality of wealth come from, is...

According to Andrew Carnegie, in his essay "Wealth", where does inequality of wealth come from, is it a problem or not, and how should it be solved?

Investor B maximizes his utility function by investing 40% of his wealth in the risk-free asset. What fraction of his wealth does investor B invest in X?

Consider an economy consisting of two stocks (X and Y) and a risk-free asset. Investor A maximizes his utility function by investing 10% of his wealth in the risk-free asset, 75% in X, and 15% in Y. Investor B maximizes his utility function by investing 40% of his wealth in the risk-free asset. What fraction of his wealth does investor B invest in X?

Scott has $40,000 of his own money to invest. He approached his bank for a margin...

Scott has $40,000 of his own money to invest. He approached his bank for a margin loan to add to his money. He intends on purchasing Australian shares. The bank’s loan-to-value ratio (LVR) is 70%. Scott borrows $110,000. After six months, Scott’s portfolio value has dropped from $150,000 to $100,000. a. Calculate the LVR using the reduced portfolio value. 110,000/100,000 b. Assume the bank issues a margin call. Suggest at least two different ways that he could return his portfolio...

A supervisor has determined that the average salary of the employees in his department is $40,000...

A supervisor has determined that the average salary of the employees in his department is $40,000 with a standard deviation of $15,000. A sample of 25 of the employees’ salaries was selected at random. Assuming that the distribution of the salaries is normal, what is the probability that the average for this sample is between $36,000 and $42,000?

Adam runs his own marketing business in Australia. During the year he incurred the following expenses:...

Adam runs his own marketing business in Australia. During the year he incurred the following expenses: a) salary costs of $500,000. b) salary costs of $9,000 for his son who did some graphic design work for him as he was studying graphic design at university. The work took approximately 19 hours to complete. c) $1200 on membership to the local bowls club where he entertains clients. d) $3,000 on smart clothing that he considered necessary to portray the correct image...

Subjects