A driver faces a 5% probability that his car will be in an accident and will be worth nothing. Consider three drivers with cars that have value $30,000. Abdulla's utility function over the value of his car W is u(W) = ln(1 + W). Bedriya's utility function is u(W) = 100 + 0:5W.
a. What is Abdulla's risk premium? (hint: rst, calculate Abdulla's expected utility. Second, calculate X, Abdulla's certainty equivalent. Third, calculate the expected dollar value of the car without insurance. Fourth, calculate risk premium, the dierence between X and the expected dollar value of the car)
b. What is Bedriya's risk premium?
d. Which of these two people is less likely to take on risk? Which is more likely? How do you know?