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Doruk studies in Paris and uses a bike to get around. If his bike is stolen he would have to replace it which would cost him 300 EURO. He finds out that 10 % of the bikes in Paris are stolen every year. His total wealth is 400 EURO for a year. His utility of money function is given by U(x) = x ½.
a) Suppose that Doruk considers to take out insurance with full coverage for a year. What is the maximum premium that he would accept to pay for buying that insurance?
b) Discuss briefly what does "Fair Premium" mean. Calculate the fair premium that the insurance company would ask Doruk.
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