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In: Economics

A) Tim owns a house worth $400,000. Unfortunately, he faces a 40% risk of a loss...

A) Tim owns a house worth $400,000. Unfortunately, he faces a 40% risk of a loss of $300,000. He is an expected utility maximizer with a utility function u left parenthesis c right parenthesis equals ln left parenthesis c right parenthesis. He can buy insurance coverage K at a price of g per dollar of coverage. If g = 1/2, what is the ratio of consumption in the good state to consumption in the bad state? 0.5 1 1.5 2

B) Tim owns a house worth $400,000. Unfortunately, he faces a 40% risk of a loss of $300,000. He is an expected utility maximizer with a utility function u left parenthesis c right parenthesis equals ln left parenthesis c right parenthesis. He can buy insurance coverage K at a price of g per dollar of coverage. If g= 1/2, what is the amount of coverage he would choose? 300 250 225 200

C) Tim owns a house worth $400,000. Unfortunately, he faces a 40% risk of a loss of $300,000. He is an expected utility maximizer with a utility function u left parenthesis c right parenthesis equals ln left parenthesis c right parenthesis. He can buy insurance coverage K at a price of g per dollar of coverage. Suppose that g is subsidized by the government and he only pays $0.25 cents for each dollar of coverage (i.e. g= 1/4). What is his optimal coverage. Note:coverage can not exceed losses. 200 250 275 300

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Rahul Sunny answered 2 years ago
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