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An agent owns an apartment valued at 100.000 euros. With a probability of 1% the apartment could suffer damages that would reduce its value to 80.000 euros. There are a number of companies in the

An agent owns an apartment valued at 100.000 euros. With a probability of 1% the apartment could suffer damages that would reduce its value to 80.000 euros. There are a number of companies in the economy that are willing to offer damage insurance with a premium e per euro when people's chosen insurance coverage is X. People's preferences are described by the expected utility function: U(w) = Inw. 1) derive the conditions of the first and second order of the problem of maximizing of the expected utility 2) suppose that insurance companies get zero profits, how much will be the premium for euros? 3) What is the best choice of the agent? 4) now assume that the premium per dollar set by the companies is =0,02 how will change the choice of the agent?

Apr 05 2021 View more View Less

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