Lucy and Henry each have $9933. Each knows that with 0.1 probability, they will
ID: 1132777 • Letter: L
Question
Lucy and Henry each have $9933. Each knows that with 0.1 probability, they will lose 85% of their wealth. They both have the option of buying units of insurance, with each unit costing $0.1. Each unit of insurance pays out $1 in the event the loss occurs. The cost of the insurance policy is paid regardless of whether the loss is incurred. Lucy's utility is given by u(x) x, Henry's utility is given by Answer the following: Write your answers to 2 decimal places. a) Without insurance, what is the expected value of the loss? b) For Henry, facing the "lottery " above without any insurance is as bad as losing how many dollars for sure? c) Find Lucy's utility maximising choice of a. If more than 1 exist, enter the largest C.Explanation / Answer
Please change the Values
expected value of loss=
0.15*(986+986)
=295.8
as the probability of loosing 15% wealth is 0.90
so 295.8*0.9= 266.22$
as the probability of loosing 85% wealth is 0.10
0.85 *( 986+986)
= 1676.2
so 1676.2*0.1
= 167.62
Expected value of loss= 266.22+167.62
=433.84$
2) for lucy facing a lottery without insurance is as bad as losing-
0.9*986*0.15 + 0.1*986*0.85
=133.11+83.81
=216.92$
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