Harley's current wealth is $600, but there is a .25 probability that he will lose $100.Harley is risk neutral.He has an opportunity to buy insurance that would restore his $100 if he lost it.
A)Harley would be willing to pay a bit more than $25 for this insurance.
B)Harley would be willing to pay up to $25 for this insurance.
C)Since Harley is risk neutral, he wouldn't be willing to pay anything for this insurance.
D)Since Harley's utility function is not specified, we can't tell how much he would be willing to pay for this insurance.
E)Harley would not be willing to pay more than $16.66 for this insurance.

Question

Quizplus · Accepted Answer

As Harley is risk-neutral, he would only be willing to pay the expected value of the insurance premium. The expected value of losing $100 with a probability of 0.25 is ($100 * 0.25) = $25. Thus, Harley would be willing to pay up to $25 for this insurance, as it would provide him with a sense of security for his $600 wealth.

Harley's Current Wealth Is $600, but There Is a