 Ask Remember Me? Sammuel Murphy Posts: 1, Reputation: 1 New Member #1 Nov 2, 2016, 08:43 AM
Finding the optimal probability
Hi,

My question is regarding insurance policies where, alpha is the probability that an accident will happen and (1-alpha) is the probability it will not. The question is to find a probability alpha(min) where if the probability is greater than alpha(min) then the consumer chooses policy 1 for insurance. If alpha is lower than alpha(min) then the consumer chooses policy 2 for insurance. Given that the utility function is U=W^(1/2) where W is wealth.

I began by trying to solve by graphing the utility function and looking for the point where the probabilities intersect with the utility function but that got me no where. Although this is a proof, I am not quite sure where to begin and needed some guidance where I should start

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