Question

Bikul has just started a great job and plans to buy a fancy car worth $100,000. Bikul is risk-averse in money matters, but he likes to drive fast, so the probability that he wrecks the car (a total loss of $100,000) is 0.10. The probability that he has no accidents is 0.90. If an insurance company offers Bikul a fair insurance policy, the premium will be:
Select one:

a. $90,000.

b. It is impossible to calculate a premium unless we know Bikul's utility function.

c. $80,000.

d. $10,000.

Answer 1

Answer:

$10,000

Explanation:

Probability that Bikul wrecks the car is 0.10

loss of wrecking the car is $100000

Therefore risk of wrecking the car = Probability x loss

risk = 0.10 x 100000 = 10,000

premium can be equated with risk, hence premium = $10000