Ying-Ru is beginning her senior year of college soccer and is deciding whether or not to...

Ying-Ru is beginning her senior year of college soccer and is deciding whether or not to buy insurance in case she is injured. There is a 50% chance she will not be injured and a 50% chance she will be. If she is not injured, she will received a $400 contract to play professionally. If she is injured, she will receive a $100 contract to carry water bottles.

(b) Insurance policy A will pay Ying-Ru $300 if she gets injured, so that she will always have a total wealth of $400−p, where p is the price of the policy. What is the largest price $p that Ying-Ru would be willing to pay for this policy?

(c) Policy Boffers Ying-Ru the option of buying as many dollars of insurance as she would like, at the price of p= 2/3 for $1 of insurance. Let c_ni be Ying-Ru’s consumption when there is no injury and c₁ be her consumption when she is injured. Write Ying-Ru’s state-contingent budget constraint. (Write your answer as the equation of a line, with c_ni isolated on the left, written as a function of c_i.)

(e) If policy Bwere the the only option available, what would be the optimal amount of insurance for Ying-Ru to buy?(f) Which policy is better for Ying-Ru—policy B or policy A with p= 160?

Solutions

Expert Solution

b) Highest price p she would be willing to pay is p=175$

c) c_ni = 600 − 2n_i

e) under policy B, the optimal amount of insurance for Ying-Ru to buy is zero. The price is just high enough to make her not want to buy any insurance.

f) Because she has the option to buy policy A, and is willing to do so when p = 160, policy A makes her better off.

Rahul Sunny answered 1 year ago

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