Mathematical Economics - Expected Utility

Discrete Mathematics Level pending

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%.


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