A B
С
D
E
F
G
H
K
1
2.
3
4
Samantha's utility function is U(Y) = 70.5. She tries to maximize her expected utility. She owns a car for business that she
will have to replace if it is stolen. If her car is notstolen, her net income will be $122,500. If the car is stolen, her net income
will be reduced by the car'sreplacement cost of $20,100. The probability that the car will be stolen is 20%. Use Excel to
answer the following questions.
5
6
7
8
9
10
11
d. The insurance company is willing to offer a rebate to Samantha if she purchases the antitheft device. However, the
company would need to incur a monitoring cost to insure that Samantha installs and retains the device (to avoid moral
hazard). If the price of the device is $2,000, determine the largest monitoring cost the company would be willing to incur
while still offering a large enough rebate to cover the cost of the device? How would your answer change if the price of the
anti-theft device were $2,100?
12
13
14
15
16 Maximum acceptable monitoring cost
17
18
19
How would your answer change if the price of the anti-theft device were $2,100 instead of $2000?
20