-Mike Has the Utility of Wealth Curve Shown in the Figure

question 161

Essay

-Mike has the utility of wealth curve shown in the figure above. He owns a car worth $20,000, and that is his only wealth. There is a 10 percent chance that Mike will have an accident within a year. If he does have an accident, his car is worthless.
a) What is Mike's expected utility?
b) What is the maximum amount that Mike is willing to pay for auto insurance?
c) Suppose all car owners are like Mike insofar as they have a 10 percent chance of having an accident. An insurance company agrees to pay each person who has an accident the full value of his or her car. The company's operating expenses are $1,000. What is the minimum insurance premium that the company is willing to accept?
d) Will Mike buy the company's policy? Why or why not?

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Definitions:

Oral

Pertaining to the mouth or spoken words; used in communication through speech rather than written form.

Immediate Feedback

Quick response to a message or action, allowing for rapid adjustment and improvement.

Oral Medium

A channel of communication that involves conveying messages or information through spoken words, in contrast to written or visual mediums.

Written Medium

A form of communication that involves the use of written language to convey messages or information.