Order the answer to: You are an insurance agent…
|Question||a) What is the of Sam??s project? What is the variance?
b) What is the most that Sam is willing to pay for insurance? Assume Sam is risk neutral.
c) Suppose you found out that the Japanese are on the verge of introducing their own mayonnaise substitute next month. Sam does not know this and has just turned down your final offer of $1000 for the insurance. Assume that Sam tells you SCAM is only six months away from perfecting its mayonnaise substitute and that you know what you know about the Japanese. Would you raise or lower your policy premium on any subsequent proposal to Sam? Based on his information, would Sam accept?
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