Essay
Emilio has just bought a fancy new 65-inch OLED Smart television for $5,000.00. Suppose there is a 10% chance that the television will topple over from his entertainment unit and get smashed to pieces and a 90% chance that nothing will happen. Emilio is risk averse and his utility of wealth is U(W) = W^0.5. What is Emilio's (i) certainty equivalent and (ii) risk premium? How much is the maximum that Emilio should be willing to pay to take out insurance on his TV? How would you answers change if the probability of breakage was 1% rather than 10%?
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(i) To find Emilio's certainty equivalen...View Answer
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Correct Answer:
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