Thread: Expected utility & Insurance (for risk adverse individuals)?
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Old October 30th, 2009, 11:54 PM
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Originally Posted by TKHunny View Post
Here's your proble, right here...

Anyone in this position may not be attendign class or reading the text book. If you are taking a class and paying ANY attention AT ALL you simply MUST have SOME clue. If you REALLY have no clue after reading your text and attending class, perhaps you are in the wrong class? Perhaps you need to go have a maningful chat with yout academic advisor.

Having said that:

His expected utility, without insurance is simply:

0.05 \cdot \sqrt{5,000,000} + 0.95 \cdot \sqrt{25,000,000}

First, we would have to define what "fully" means. Does it mean $25 MM? Does it mean the Expected Utility from above? Perhaps it means to pay $20 MM if he is injured?

In the last case, he is out $2,000 right from the start. What say you? What, exactly, does "fully" mean?
There is another problem, in that his utility is defined in terms of his wealth, so surly we need to know how much he presently has and how the value of the contract adds to his wealth (progressive tax, agent's fees, ...)?

CB
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