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Unformatted text preview: = 5.33 iii) (8-1)(.6667) + (1+3-1)(.333) = 5.67 iv) (8)(.667) + (1)(.333) = 5.67 Thus, the highest to lowest expected income go iv ~ iii, ii, i. The least to greatest exposure to risk go: i, ii, iii, iv To say anything about his preferences between the four options, we will need to use his vNM function as we do in part (f). (f) i) (log (8-4) / log (2))(.6667) + (log(1+7-4) / log(2))(.333) = 2 ii) (log (8-2) / log (2))(.667) + (log(1+5-2) / log(2))(.333) = 2.38 iii) (log (8-1) / log(2))(.667) + (log(1+3-1) / log(2))(.333) = 2.40 iv) (log (8) / log (2))(.667) + = 2 He will choose contract ii or iii because his utility for this insurance contract is higher Than if he were uninsured. He will not choose to be fully insured because in part d), the highest premium he would Pay is $4m, and contract i only offers $7m in coverage instead of $8m (full) for $4m....
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This note was uploaded on 04/13/2010 for the course ECON 330 taught by Professor Minetti during the Fall '08 term at Michigan State University.
- Fall '08