Unformatted text preview: However, the only insurance which is available has a maximum coverage of $15,000, i.e. the policy will pay only $15,000 if the car suffers a total loss in an accident. The price of the policy is $1,800. There is a 10% chance of having an accident in which the car is a total loss. The focus here is to calculate the expected values with and without insurance. It is not necessary to calculate the variance and standard deviation, as it is obvioua that there is less risk with insurance. (a) Will a riskaverse individual buy the insurance? Show your work and explain. (b) Will a riskneutral individual buy the insurance? Show your work and explain. (c) Will a riskloving individual buy the insurance? Show your work and explain. (d) How would your answer to (a)(c) change if the policy paid $20,000 if the car was a total loss? Explain....
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 Summer '10
 JohnGonzales
 Variance, Probability theory, bank account, Cauchy distribution, total loss

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