The amount of utility Alec gets from income is governed by the function U = I .
ID: 1206535 • Letter: T
Question
The amount of utility Alec gets from income is governed by the function U = I. He has made an investment that has a 40% chance of paying $900 and a 60% chance of paying $90,000. Alec wants to buy an insurance plan for his investment. Which of the following policies would give him complete insurance?
The insurer pays Alec $45,000 if the investment pays $900, and Alec pays a premium of $45,000 to the insurance company if the investment pays $90,000.
The insurer pays Alec $44,100 if the investment pays $900, and Alec pays a premium of $44,100 to the insurance company if the investment pays $90,000. See Section 13.5.
The insurer pays Alec $35,640 if the investment pays $900, and Alec pays a premium of $53,460 to the insurance company if the investment pays $90,000.
The insurer pays Alec $53,460 if the investment pays $900, and Alec pays a premium of $35,640 to the insurance company if the investment pays $90,000.
The insurer pays Alec $45,000 if the investment pays $900, and Alec pays a premium of $45,000 to the insurance company if the investment pays $90,000.
The insurer pays Alec $44,100 if the investment pays $900, and Alec pays a premium of $44,100 to the insurance company if the investment pays $90,000. See Section 13.5.
The insurer pays Alec $35,640 if the investment pays $900, and Alec pays a premium of $53,460 to the insurance company if the investment pays $90,000.
The insurer pays Alec $53,460 if the investment pays $900, and Alec pays a premium of $35,640 to the insurance company if the investment pays $90,000.
Explanation / Answer
The insurer pays Alec $53,460 if the investment pays $900, and Alec pays a premium of $35,640 to the insurance company if the investment pays $90,000.
This is because insurer will be paying Alec more than anyother scheme and Alec will be paying the least premium among the other schemes.
Also, having 60% changes of getting 90,000; the lower the premium on is better.
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