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HW1 2013
HW1 2013
x
400
900
Pr[ X x]
Pr[Y y]
0.5
0.5
100
1600
0.6
0.4
Show that he prefers X to Y . Determine for which values of w he should decline the offer. Can you think of utility functions with which he would prefer Y to X ?
Question2
An insurer undertakes a risk X and after collecting the premium, he owns a capital w=100. What is the maximum premium the insurer is willing to pay to a reinsurer to take over the complete risk, if his utility function is u(w) log( w) and Pr[ X 0] Pr[ X 36] 0.5 ? Determine not only the exact value, but also the approximation ( Kaas, 1.18) of Example 1.2.4.
Question3
Assume that the reinsurers minimum premium to take over the risk of the previous exercise equals 19 and that the reinsurer has the same utility function. Determine his capital W.
Question4
Assume that the marginal utility of u ( w) is proportional to 1 / w , i.e., u (w) k / w for some k 0 and all w 0 . What is u ( w) ? With this utility function, which prices P in the St. Petersburg paradox of Example 1.2.1 (Kaas) make entering the game worthwhile?
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