Quiz 9_Solutions - With an accident Income = $160,000...

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Finance 30210 Quiz #9 Name________________________ Section________________ 1) Suppose that the probability of getting in an accident is 2%. The average cost of an accident is $120,000. Suppose that the average car driver has preferences given by ( ) I I U = a) Assuming that this individual earns $160,000 per year in income, calculate his expected utility if he buys no insurance.
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Unformatted text preview: With an accident: Income = $160,000 - $120,000 = $40,000 Utility = SQRT(40,000) = 200 W/out an accident: Income = $160,000 Utility = 400 Expected Utility = .02(200) + .98(400) = 396 b) Calculate the amount this individual would be willing to pay for a full coverage insurance policy. (396)^2 = $156,816 Premium = $160,000 – 156,816 = $3,184...
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