Suppose a consumer has a utility function u(x) = 10*sqrt(x), where x is money income. The consumer's initial endowment is Rs. 50. She may suffer a loss of Rs. 25 with probability 0.5. She pays premium p for an insurance policy that fully reimburses her if she suffers a loss. How much premium p would she be willing to pay to insure against the loss?
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Choice under uncertainty has come up 27 times in 7 exams since 2007.
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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Question from the UGC-NET 2023 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.