Suppose the Ajax Insurance Company provides insurance for skydivers whose wealth before diving is $400.An accident will leave divers with a wealth of $100.The company divides the divers into two classes,safe (probability of an accident = 0.2)and unsafe (probability of an accident = 0.5).The utility of wealth for all divers is given by the function: U(w)= w^0.5.Given this information,the divers are:

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Quizplus · Accepted Answer

The divers are risk-averse because their utility function exhibits diminishing marginal utility of wealth. In other words, they value additional wealth less and less as they have more of it. This is captured by the concave shape of their utility function. As a result, they will prefer to avoid the risk of losing a large portion of their wealth, even if the expected value of their wealth is the same.

Suppose the Ajax Insurance Company Provides Insurance for Skydivers Whose