An agent with a logarithmic utility function of wealth tries to maximize his expected utility....
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Accounting
An agent with a logarithmic utility function of wealth tries to maximize his expected utility. He faces a situation in which he will incur a loss of L with probability . He has the possibility to insure against this loss. The insurance premium depends on the extent of the coverage. The amount covered is denoted by h and the price of the insurance per unit of coverage is p (hence the amount he has to spend on the insurance will be hp ). - Calculate the amount of coverage h demanded by agent as a function of his wealth level Y, the loss L, the probability and the price of the insurance p. - What is the expected gain of an insurance company offering such a contract? - If there is perfect competition in the insurance market (zero profit), what price p will the insurance company set? - What amount of insurance will the agent buy at the price calculated under (c). What is the influence of the form of the utility function
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