Suppose You Rent an Apartment and Are Worried About a Break-In

question 16

Essay

Suppose you rent an apartment and are worried about a break-in that results in theft of your property.Suppose your monthly consumption level is currently $4,000 but a break-in would result in you having to finance your purchase of replacement property -- and this would reduce your current consumption to $2,000 per month.There is a 10% chance of a break-in.
a.On a graph with "consumption" on the horizontal and "utility" on the vertical axis, illustrate a utility/consumption relationship that is consistent with risk averse tastes.
b.On your graph, illustrate the utility in the "good" state, the utility in the "bad" state and the expected utility of facing the gamble.
c.Which of these changes when the probability of a break-in increases to 20%?
d.A renter's insurance policy consists of a premium p and a benefit level b.What is (b,p) for full, actuarily fair insurance before and after the increase in risk?
e.True or False: You are more likely to buy actuarily fair full insurance after the increase in risk than before.

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Definitions:

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A root vegetable, typically orange in color, cultivated for its edible taproot that is rich in vitamins, minerals, and fiber.