There are two types of ladders on the market that can be used for painting: Safe...

There are two types of ladders on the market that can be used for painting: Safe ladders which cost $6 and Risky ladders which cost $4. The probability of falling (accidently) off the Safe ladder is 0.10 and the probability of falling off the risky ladder is 0.40. If the painter does not fall then the income (I) from painting is $20, if the painter falls then income is $12. Lower income might be because the painter can’t work the next day because of injury. The painter’s utility function is√?.

Which ladder will be purchased when the painter has no insurance against an accident?
Now assume that the painter can buy insurance for $2 which provides the painter with an income of $20 no matter what happens. Which ladder will be purchased?
Assume that the insurance company can identify Risky ladders and Safe ladders. If the insurance company sets a price of $2 for Safe ladders, what price would it have to charge on Risky ladders to get painters to buy Safe ladders?

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Rahul Sunny answered 1 year ago

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