CHAPTER 1

Steve and Woody have the same utility function, u (x) =

x .

Steve has wealth 10 and forces a random loss which is

distributed on the interval (0,10).
Woody has wealth 20 and faces a random loss which is
distributed on the interval (0,20).
The maximum amount Steve is willing to pay for complete
against the loss is S.
The maximum amount of woody is willing to pay for complete
against the loss is W.

A decision maker has wealth of 200 and a utility function u(x)=

uniformly
uniformly
insurance
insurance

log e X

The decision maker faces a random loss as follows:

Amount of loss
Probability of loss
0
0.50
50
0.25
100
0.25
Determine the maximum premium the decision maker would be willing to
pay for complete insurance against the loss.

2
A decision maker with wealth to 10 has the utility function u(x) = x . The

decision maker faces a random loss which has mean 5 and variance 11.
Determine the maximum amount that the decision maker will pay for
complete insurance against the random loss.

3 x

A decision maker has utility function u(x) = - e

and initial wealth w.

The decision maker faces two random loss :

1) Loss X has a normal distribution with mean and variance 4; and
2) loss Y has a normal distribution with mean 10 and variance 8
Determine the maximum value of for which the decision maker prefers X
to Y

w
An insurer has wealth 1 and utility function u(w)= e
. The insurer will

pay the full amount of a random loss which is uniformly distributed on the
interval (0,1). Determine the minimum acceptable premium for this
coverage.

Bob faces a random loss with p.d.f

f(x) =

wealth of 100. His utility function is u(x) =

1
100 , 0x100. He has a

x , x0.

He can buy

insurance to cover this loss in a market of all feasible insurance policies,

each of which can be purchased for its expected loss payment. He will
spend 18 for the insurance. Determine his maximum expected utility.
Hint (as he will spend 18, so he decided to purchase the insurance)

A decision maker has wealth 10 and utility function u(w) =

log 10 (w) . The

decision maker faces a loss of 9 which has probability 0.5 of occurring.

Determine the maximum amount that the decision maker would be willing
to pay for insurance which will pay 6 in the event such a loss.