Question
Statistics for Economics Question on Probability theory
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) = w3. Then the individual will buy full insurance by paying a premium of Rs. _____ Lakh (round off to 2 decimal places).
Answer
The correct answer is: 0.56 or 0.60 (approx.)