New answers tagged uncertainty
3
Let $c$ be the cost per unit of insurance, so the premium is equal to $cn$. Then the agent maximises:
$$
p(u(w - L - cn + n) + (1-p)u(w - cn).
$$
The first order condition with respect to $n$ is given by:
$$
(1 - c) p u'(w - L - cn + n) - c (1-p) u'(w - cn) = 0
$$
Rearranging gives:
$$
\frac{p}{1 - p} = \frac{c}{1 - c} \frac{u'(w - cn)}{u'(w - L - cn + n)}.
$...
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