A Problem of Risk Aversion: An Insurance Model with Excel Solver

Abstract

In this paper we present a tutorial exercise where students can solve a particular problem of insurance demand using the Excel Solver, and explore the main features of this type of problem. The document pretends to be self-contained since it includes an introductory theoretical background on choice under uncertainty with the most important tools and concepts required. Next, we introduce an exercise that solves the model in an Excel spreadsheet and do several comparative statics analysis. Finally, we present some practice exercises and provide a worksheet that allows the student to visualize the analysis with an interactive graph.

Keywords: Uncertainty, von Neumann-Morgenstern expected utility theory, Certainty equivalent, Risk premium, Insurance, Excel Solver

JEL Classification: A22, C65, D89