Mathematical Economics - Expected Utility
Mr. X had just purchased a new car for $10,000. His utility from the car can be expressed as :-
U(Car)=log(Car) where Car is the value of the car. For simplicity, we assume the purchase price=value of car.
In general, new car owners have 25% chance of getting into an accident resulting in an average loss of $1,000. Therefore, they will purchase insurance to protect the loss of utility.
Mr. X would like to guard against this loss by purchasing insurance. Determine if Mr. X will/will not purchase insurance if the probability of meeting an accident increases from 25% to 30%.