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.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Your utility function over x and y is U ( x , y ) = l...

Your utility function over x and y is U ( x , y ) = l n ( x ) + 0.25 y. Your income is $20. You don’t know the prices of x or y so leave them as variables (p x and p y). a) (8 points) Find x*, your demand function for x. Find y*, your demand function for y. b) (10 points) Find the cross-price elasticity of demand for x (E x ∗ , p y:...

Suppose that an individual has a utility function of the form U = Y½ where U...

Suppose that an individual has a utility function of the form U = Y½ where U is utility and Y is income. a) Calculate the utility level for Y values of $10,000, $40,000, $90,000, $160,000, and $250,000 and then plot the individual’s total utility function. b) This individual is currently earning $90,000 but has a 50-50 chance of earning either $40,000 or $160,000 in a new job. i) Calculate the expected income and utility from the new...

Jim’s utility function is U(x, y) = xy. Jerry’s utility function is U(x, y) = 1,000xy...

Jim’s utility function is U(x, y) = xy. Jerry’s utility function is U(x, y) = 1,000xy + 2,000. Tammy’s utility function is U(x, y) = xy(1 - xy). Oral’s utility function is -1/(10 + xy. Billy’s utility function is U(x, y) = x/y. Pat’s utility function is U(x, y) = -xy. a. No two of these people have the same preferences. b. They all have the same preferences except for Billy. c. Jim, Jerry, and Pat all have the same...

Suppose a consumer's utility function is given by U ( X , Y ) = X...

Suppose a consumer's utility function is given by U ( X , Y ) = X 1 2 Y 1 2. The price of X is PX=8 and the price of Y is PY=5. The consumer has M=80 to spend. You may find that it helps to draw a graph to organize the information in this question. You may draw in the blank area on the front page of the assignment, but this graph will not be graded. a) (2...

Suppose that the utility function of a consumer is U(x,y) = x ¼y ¾, where x...

Suppose that the utility function of a consumer is U(x,y) = x ¼y ¾, where x and y are the quantities of the good X and good Y consumed, respectively. The consumer's income is 400. (a) What is the demanded bundle when the price of good X is 10 and the price of good Y is 10? (b) Redo part (a) when the price of good X is doubled? (c) Redo part (a) when the price of good Y is...

Suppose that a consumer’s utility function is U(x, y) = xy . The marginal utilities for...

Suppose that a consumer’s utility function is U(x, y) = xy . The marginal utilities for this utility function are MUx= y and MUy= x. The price of y is Py = 1. The price of x is originally Px = 9 and it then falls to Px = 4. The consumer’s income is I = 72. (15 points) What x-y combination (xA*, yA*) maximizes utility in the original situation where Px = 9? Why? (15 points) What x-y combination (xC*,...

Suppose a consumer has a utility function given by u(x, y) = x + y, so...

Suppose a consumer has a utility function given by u(x, y) = x + y, so that the two goods are perfect substitutes. Use the Lagrangian method to fully characterize the solution to max(x,y) u(x, y) s.t. x + py ≤ m, x ≥ 0, y ≥ 0, where m > 0 and p < 1. Evaluate and interpret each of the multipliers in this case. What happens to your solution when p > 1? What about when p =...

Suppose Anne’s utility function for food (X) and clothing (Y) is given by U (X,Y) =...

Suppose Anne’s utility function for food (X) and clothing (Y) is given by U (X,Y) = 4X1/2 + Y and Anne had budget constraint I = PxX + PyY. a. Find Anne’s optimal bundle if Px = 4 and Py = 4 and Anne has I = 60. b. Discuss how the demand for X depends on her income. c. Suppose now that the price of X increases to 8. Find the SE and IE of the price change.

Ethel has preferences over amounts of goods 1 and 2 represented by the utility function u(x1,...

Ethel has preferences over amounts of goods 1 and 2 represented by the utility function u(x1, x2) = (x1)^2 + x2, where x1 denotes how much of good 1 she has and x2 denotes how much of good 2 she has. Write an expression for Ethel’s marginal utility for good 1. Does she like good 1? Explain your answer. Write an expression for Ethel’s marginal rate of substitution at any point. Do Ethel’s preferences exhibit diminishing marginal rate of substitution?...

Esther consumes goods X and Y, and her utility function is U(X,Y)=XY+Y For this utility function,...

Esther consumes goods X and Y, and her utility function is U(X,Y)=XY+Y For this utility function, MUX=Y MUY=X+1 a. What is Esther's MRSXY? Y/(X + 1) X/Y (X + 1)/Y X/(Y + 1) b. Suppose her daily income is $20, the price of X is $4 per unit, and the price of Y is $1 per unit. What is her best choice? Instructions: Enter your answers as whole numbers. X = Y = What is Esther's utility when her...

Subjects