. Suppose there are two conditions faced by a consumer, 1 and 2. State 1 occurs with probability, and wi indicates the consumer's wealth for each state i. a) If the consumer is strictly risk averse and w1 = w2, show that the insurance company can provide insurance that keeps his wealth constant, both in conditions 1 and 2, so that he is better off and the insurance company gets the expected profit. b) Suppose there are many consumers and there are many insurance companies and the proper allocation is such that the wealth each consumer is constant, both under

. Suppose there are two conditions faced by a consumer, 1 and 2. State 1 occurs with probability, and wi indicates the consumer's wealth for each state i. a) If the consumer is strictly risk averse and w1 = w2, show that the insurance company can provide insurance that keeps his wealth constant, both in conditions 1 and 2, so that he is better off and the insurance company gets the expected profit. b) Suppose there are many consumers and there are many insurance companies and the proper allocation is such that the wealth each consumer is constant, both under

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.4P

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22. Suppose there are two conditions faced by a consumer, 1 and 2. State 1 occurs with
probability n, and wi indicates the consumer's wealth for each state i.
a) If the consumer is strictly risk averse and w1 = w2, show that the insurance company
can provide insurance that keeps his wealth constant, both in conditions 1 and 2, so
that he is better off and the insurance company gets the expected profit.
b) Suppose there are many consumers and there are many insurance companies and the
proper allocation is such that the wealth each consumer is constant, both under
conditions 1 and 2. Suppose also that in this case, some consumers can insure others.
Show that the same level of wealth for consumers and the benefits expected by
insurance companies can be achieved with a reasonable allocation where no other
insured consumer.

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