Question
In: Economics
Consider a risk averse individual who faces uncertainty with two outcomes: good, bad. The individual has...
Consider a risk averse individual who faces uncertainty with two outcomes: good, bad. The individual has income $360 under good and $90 under bad outcome. The probability of good outcome is 5/9 (so the probability of bad outcome is 1 − 5/9 = 4/9). The individual can buy any non-negative x units of insurance. Every unit of insurance has price $p and it pays $1 in the event of bad outcome.
(a) Suppose the unit price of insurance is p = 1/2. Determine if the insurance market is competitive or not.
(b) Suppose the individual buys x units of insurance. Determine the individual's net income under good income, net income under bad income and the average net income. Draw these three in a diagram as functions of x.
(c) For the individual: (i) compare full insurance with over insurance and (ii) compare full insurance with partial insurance. Then determine best choice of insurance for the individual.
(d) Suppose the individual is risk neutral instead of risk averse. Determine best choice of insurance for the individual.
Solutions
Rahul Sunny answered 2 years agoRelated Solutions
Consider a risk averse individual who faces uncertainty with two outcomes: good, bad. The individual has...
Consider a risk averse individual who faces uncertainty with two
outcomes: good, bad. The individual has income $360 under good and
$90 under bad outcome. The probability of good outcome is 5/9 (so
the probability of bad outcome is 1 − 5/9 = 4/9). The individual
can buy any non-negative x units of insurance. Every unit
of insurance has price $p and it pays $1 in the event of
bad outcome.
(a) Suppose the unit price of insurance is p...
Consider the following statement “For two gambles with the same expected value, a risk-averse individual will...
Consider the following statement
“For two gambles with the same expected value, a risk-averse
individual will be indifferent between the two gambles.”
Do you agree with the statement? With the use of an
appropriate diagram(s), explain your answer.
Assume that an individual is risk-averse and has a utility function regarding income that can is...
Assume that an individual is risk-averse and has a utility function regarding income that can
is described mathematically as U = Y. The benefits of increased income are positive, but declining
marginal utility.
A person with that benefit function knows that there is a ten (10) percent risk of being ill. He is in
average sick every ten days. The person receives 1,000 dollar per day when he works, which means
that the expected salary is 0.90 * 1000 per...
Assume that an individual is risk-averse and has a utility function regarding income that can is...
Assume that an individual is risk-averse and has a utility function regarding income that can
is described mathematically as U =√Y. The benefits of increased income are positive, but declining
marginal utility.
A person with that benefit function knows that there is a ten (10) percent risk of being ill. He is in
average sick every ten days. The person receives 1,000 dollar per day when he works, which means
that the expected salary is 0.90 * 1000 per day....
Consider an individual who purchases two goods. Let ? denote the quantity of good 1 that...
Consider an individual who purchases two goods. Let ? denote
the
quantity of good 1 that this person buys, and let ? denote the
quantity of good 2 that
this person buys. The income earned by this individual provides
money in the
amount ?=540 which this person can use to spend on these two goods.
The price of
good 1 is ?! = 5 and the price of good 2 is ?" = 5. This person’s
happiness is
determined by...
If corporate managers are risk-averse, does this mean they will not take risks? Describe how uncertainty...
If corporate managers are risk-averse, does this mean they
will not take risks? Describe how uncertainty is calculated into
cash flows. As a corporate financial manager, would you prefer a
low-risk, low-return project or a high-risk, high-return project,
and why? This is not a question about what you would do as an
individual but instead what you would do as a manager at a
for-profit company.
Is home ownership good or bad for an individual? Discuss why or why not. Write two...
Is home ownership good or bad for an individual? Discuss why or
why not.
Write two to three large paragraphs
Consider a monopolist who has a cost function of ?(?)=???. This monopolist faces two consumers, the...
Consider a monopolist who has a cost function of ?(?)=???. This
monopolist faces two consumers, the first having demand
??(??)=??−?? and the second having demand ??(??)=??−??.
a) Calculate the profit-maximizing price and then the optimal
quantity sold to each consumer under uniform pricing, i.e. the
monopolist charges the same price for both consumers. What are the
monopolist’s profits?
b) Suppose now that the monopolist can engage in third degree price
discrimination. Find the monopolists profit maximizing prices for
consumers 1...
Consider a monopolist who has a cost function of ?(?)=???. This monopolist faces two consumers, the...
Consider a monopolist who has a cost function of ?(?)=???. This
monopolist faces two consumers, the first having demand
??(??)=??−?? and the second having demand ??(??)=??−??.
a) Calculate the profit-maximizing price and then the optimal
quantity sold to each consumer under uniform pricing, i.e. the
monopolist charges the same price for both consumers. What are the
monopolist’s profits?
b) Suppose now that the monopolist can engage in third degree price
discrimination. Find the monopolists profit maximizing prices for
consumers 1...
1. Which of the following statements describes a risk averse individual? a. Her risk premium is...
1. Which of the following statements describes a risk averse
individual?
a.
Her risk premium is positive
b.
Her risk premium is negative
c.
Her risk premium is zero
d.
None of the above
2. Which of the following statements describes a risk loving
individual?
a.
Her certainty equivalent is greater than the expected value of
the income from the chosen activity
b.
Her certainty equivalent is less than the expected value of the
income from the chosen activity
c....
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