What is the optimal action for the agent

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Reference no: EM13983938

Insurance Consider a risk avers agent who owns an asset worth 100 USD. The agent can choose one of two actions: being cautious a1 or being negligent (a0). The agent’s payoff from having wealth w and taking action a is given by u(w_1,a_0 )=√x and u(w_1,a_1 )=√x-3. There are two possible states of nature: either damage occurs, in which case the asset is lost, or no damage occur, in which case nothing happens to the asset. The probability that damage occurs equals 50% if the agent’s negligent, and 25% if he’s cautious. a.) What is the optimal action for the agent?

Reference no: EM13983938

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