A driver has an initial wealth of $10000 and faces a 10% chance of an accident which results in $5000 worth of damages. A deductible contract with deductible D. driver must pay first $D in damages. The driver is risk averse with utility function given by U(W)=ln(W)
a) what is actuarially fair premium with deductible D? Calculate the certainty equivalent for actuarially fair insurance contract with $1000 deductible?
b) suppose the driver can choose any level of deductible at actuarially fair prices. What level of deductible would he choose? and why might people choose contacts with positive deductibles in real life?