Question

Tim owns a house worth $400,000. Unfortunately, he faces a 40% risk of a loss of $300,000. He is an expected utility maximizer with a utility function . He can buy insurance coverage K at a price of g per dollar of coverage. Suppose that g is subsidized by the government and he only pays $0.25 cents for each dollar of coverage (i.e. g= 1/4). What is his optimal coverage. Note:coverage can not exceed losses.

Answer 1

Given data;

u=ln c,

g=.25

as coverage cant be more than losses.so

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