<p>An individual faces an uncertain prospect, where wealth could be Rs. 10 Lakh with
probability 0.75 and Rs. 7 Lakh with probability 0.25.
Let the utility function be U (w) = w^3. Then the individual will buy full insurance by
paying a premium of Rs. Lakh __________________</p>
<p>Clearly the person is a risk lover as we can derive from the utility function.From my knowledge what I think is that the person won't buy insurance and hence insurance premium will be 0.
Rectify me if I'm wrong.</p>

CC BY-SA 4.0
2024-10-24T16:04:22.330Z
While your intuition is certainly in the right direction, I think the intent of the question is for you to *derive* from the given utility function and prospect the precise value of the premium.
Herr K.
CC BY-SA 4.0
2024-10-24T16:23:54.810Z
Using the formula to calculate insurance premium the precise value is coming -.2 approx.
rhyme
CC BY-SA 4.0
2024-10-24T17:18:33.953Z
That looks about right. You'll just have to interpret what it means for someone who is willing to pay a negative amount to fully insure against risk.
Herr K.
<microeconomics><uncertainty>
A risk lover will never buy insurance or pay premium?
rhyme
# A risk lover will never buy insurance or pay premium?

(Asked by: username_0 on 2024-10-24)

An individual faces an uncertain prospect, where wealth could be Rs. 10 Lakh with
probability 0.75 and Rs. 7 Lakh with probability 0.25.
Let the utility function be U (w) = w^3. Then the individual will buy full insurance by
paying a premium of Rs. Lakh \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Clearly the person is a risk lover as we can derive from the utility function.From my knowledge what I think is that the person won't buy insurance and hence insurance premium will be 0.
Rectify me if I'm wrong.

**Tags:** microeconomics, uncertainty

> **Comments:**
> **username_1**: While your intuition is certainly in the right direction, I think the intent of the question is for you to *derive* from the given utility function and prospect the precise value of the premium.  
> **username_0**: Using the formula to calculate insurance premium the precise value is coming -.2 approx.  
> **username_1**: That looks about right. You'll just have to interpret what it means for someone who is willing to pay a negative amount to fully insure against risk.  

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## 0 answers

