1. Purchasing Insurance: Suppose that the household has the utility function u(c) = log(c). The household also possess wealth m = $1000 and in the event of an auto accident, the household will face a loss of L = $400. Additionally, the household believes that there is a 25% chance that they will be in an accident each year. Suppose that the auto insurance by the household is considered fair. The household is trying to decide how much auto insurance (K) to buy. (d) Find the optimal level of insurance. (e) Suppose that the insurance is not fair, so that y = 0.4. Show that the household will consume less in the accident state than in the now accident state.

1. Purchasing Insurance: Suppose that the household has the utility function u(c) = log(c). The household also possess wealth m = $1000 and in the event of an auto accident, the household will face a loss of L = $400. Additionally, the household believes that there is a 25% chance that they will be in an accident each year. Suppose that the auto insurance by the household is considered fair. The household is trying to decide how much auto insurance (K) to buy. (d) Find the optimal level of insurance. (e) Suppose that the insurance is not fair, so that y = 0.4. Show that the household will consume less in the accident state than in the now accident state.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.8P

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A5
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