Question

In: Economics

Suppose Hannah is strictly risk averse with a utility function u over monetary amounts (y): u(y)...

Suppose Hannah is strictly risk averse with a utility function u over monetary amounts (y): u(y) = y*(1/2) Hannah is facing a risky situation: Either nothing happens to her wealth of $576 with probability 3/4 or she loses everything (so ends up with $0) with probability 1/4.

6. What is the optimal amount of coverage that Hannah will purchase at a premium of 25 cents per dollar of coverage? Provide numerical value.

7. What is Hannah's expected utility if she purchases full coverage at 25 cents per dollar of coverage? Use two decimals in your numerical answer.

8. Suppose the insurance premium per dollar of coverage is no longer 25 cents, but 50 cents. Check all the correct statements.

A.Hannah would still purchase full coverage.

B.Hannah would purchase less than full coverage.

C.Hannah is better off choosing a coverage of $500 than full coverage.

D.Hannah is better off purchasing no insurance than full coverage.

E. Hannah is better off choosing a coverage of $500 than $300.

F. Hannah is better off choosing a coverage of $300 than no insurance.

G.Hannah is better off choosing a coverage of $500 than no insurance.

9. Suppose we depict Hannah's insurance problem in the state-contingent space with the payoffs in the good state of the world on the horizontal axis. Check all the statements that are true.

A. Hannah's indifference curves in the state-contingent space have a slope with an absolute value of 3 at the 45-degree line.

B. With an insurance premium of 50 cents per dollar of coverage, Hannah's budget constraint has a slope with an absolute value of 1/2.

C. With an insurance premium of 50 cents per dollar of coverage, Hannah's budget constraint has a slope with an absolute value of 1.

D. With an insurance premium of 25 cents per dollar of coverage, Hannah's budget constraint has a slope with an absolute value of 1/3.

E. With an insurance premium of 25 cents per dollar of coverage, Hannah's budget constraint has a slope with an absolute value of 3.

F. Hannah's indifference curve is always tangent to her budget constraint.

Expert Solution

Rahul Sunny answered 2 years ago

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