Amy’s income is $ 10,000 and she is risk averse. The probability of someone slipping on...

Amy’s income is $ 10,000 and she is risk averse. The probability of someone slipping on her sideway is 1/8. If this happens, she will be sued for $5,000 and will have to pay that amount. She can purchase insurance at a price of $0.2 per dollar of coverage. Show how the equilibrium amount of insurance coverage is determined. If her utility of money is given as U=m^0.5, where m is the money amount in a particular state, calculate the optimal insurance.

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Expert Solution

Optimal insurance is one that sets marginal utilities in the bad and good states equal.

Rahul Sunny answered 2 years ago

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