1*. Maria\'s house is worth 1 000 000 SEK. Her utility function is given by U -m

Question

1*. Maria's house is worth 1 000 000 SEK. Her utility function is given by U -m3, where m represents her wealth (the value of the house). The probability of the house burning down is 0,2. A fire would reduce the house value to 300 000 SEK Suppose that Maria can buy insurance that yields K SEK in case the house burns down. The insurance will cost her 0,2K SEK e) Suppose Joseph 1s in the same situation as Maria, i.e., his house is worth 1 000 000 SEK. His utility function is given by U -m, where m represents her wealth (the value of the house) The probability of the house burning down is 0,2. A fire would reduce the house value to 300 000 SEK. Fires in the houses are independent in the statistical sense. Is it beneficial for Maria and Joseph to establish a mutual insurance company whereby the share losses? Calculate Maria's new expected utility given that they have created a mutual insurance company and discuss the result.

Explanation / Answer

Now if Joseph and Maria starts the Insurance company then the new expected utility can be different but it depends on the occurence of event (fire) if it occure the expected utilty will be higher otherwise it will marginal,But it will not deline to the Dimnishing stage

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