An individual owns a mobile phone worth Rs. ; current wealth is Rs. (including the phone). There is a percent chance of theft and an actuarially fair policy is available. With , the maximum willingness to pay for such an actuarially fair insurance policy is Rs. ________ (rounded off to nearest integer).
2 marksMicroeconomicsChoice under uncertaintyInsurance, risk sharing and intertemporal choiceHardabout 3 min
IIT JAM 2024 Question 51: Choice under uncertainty
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Plain-text version
An individual owns a mobile phone worth Rs. 40,000; current wealth is Rs. 2,00,000 (including the phone). There is a 20 percent chance of theft and an actuarially fair policy is available. With U(W)=√W, the maximum willingness to pay for such an actuarially fair insurance policy is Rs. (rounded off to nearest integer).
Also written as: An individual owns a mobile phone worth Rs. 40,000; current wealth is Rs. 2,00,000 (including the phone). There is a 20 percent chance of theft and an actuarially fair policy is available. With U(W)=sqrt(W), the maximum willingness to pay for such an actuarially fair insurance policy is Rs. (rounded off to nearest integer).
Choice under uncertainty has come up 27 times in 7 exams since 2007.
What this question tests
This question is on Insurance, risk sharing and intertemporal choice, part of Choice under uncertainty in Microeconomics.
How insurance and saving let people smooth consumption across states and over time.
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