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[25] 1. An individual has an asset valued at $100,000. There is a 20% chance this asset loses 80% of its value. In order to protect himself against this loss he considers buying insurance, priced at 25e on the dollar. The individual's utility function is, VW, where W is his wealth (includes asset value and out-of-pocket expenses paid for insurance coverage). [10] (a) How much insurance coverage is purchased for the expected utility maximizing individual? 151 (b) Is this actuarially) fair insurance? If not, what price is (actuarially) fair? Explain. [10] (c) If the customer was offered full coverage or none, what is the most the consumer would be willing to pay for full coverage? [25] 1. An individual has an asset valued at $100,000. There is a 20% chance this asset loses 80% of its value. In order to protect himself against this loss he considers buying insurance, priced at 25e on the dollar. The individual's utility function is, VW, where W is his wealth (includes asset value and out-of-pocket expenses paid for insurance coverage). [10] (a) How much insurance coverage is purchased for the expected utility maximizing individual? 151 (b) Is this actuarially) fair insurance? If not, what price is (actuarially) fair? Explain. [10] (c) If the customer was offered full coverage or none, what is the most the consumer would be willing to pay for full coverage

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