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Frank’s car is worth $10,000. There is a 10% chance of him having a car accident,...

  1. Frank’s car is worth $10,000. There is a 10% chance of him having a car accident, which would reduce the value of his car to $0. His utility function is ?(?) = √?. . Frank can buy insurance, which pays him $10,000 if an accident occurs. The price of insurance is $1,000.
  1. Answer the following questions:
  1. Will Frank buy insurance? Justify your answer. [2 marks]
  1. What is most he would pay for insurance? [2 marks]
  2. Illustrate your answer using a suitably labelled diagram [3 marks]
  3. Suppose he can only partially insure with a payout of $5000 in the event of an accident for a premium of $500. Will he take this insurance? [3 marks]
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