George has a car worth $10,000. With probability 0.05, George will have an accident and the...

George has a car worth $10,000. With probability 0.05, George will have an accident and the car will only be worth $6,000. If George has a utility function u(x) = x0.5, what price of insurance will make George just indifferent between taking out insurance and not taking insurance? (a.) 122 (b.) 224 (c.) 287 (d.) 301

Solutions

Expert Solution

Expected utility =0.05*(6000)^0.5+ 0.95*(10000)^0.5= 98.87

x^0.5= 98.87

x= 9775.2

The price Geogre would be willing to pay for insurance= 10000-9775.2 ≈ 224

So answer is b. 224

Rahul Sunny answered 2 years ago

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