4. Suppose co = 0 and c1 = 70, 000. Is insurance at coverage level z > 0 fair insurance? What coverage level z* would Fiona choose? Explain. 5. Suppose co = 100 and ci = 70,000. Is insurance at coverage level z > 0 fair insurance? What coverage level z** would Fiona choose? Explain. (Note that co = 100 is an "avoidable fixed cost" which is only paid if she chooses strictly positive insurance coverage. However, the "marginal cost" of additional insurance, c1 = 70, 000, is the same as in the previous part.) 6. Suppose co = 100 and cı = 72,000. Is full insurance, that is, coverage level z =1 optimal? Explain.
4. Suppose co = 0 and c1 = 70, 000. Is insurance at coverage level z > 0 fair insurance? What coverage level z* would Fiona choose? Explain. 5. Suppose co = 100 and ci = 70,000. Is insurance at coverage level z > 0 fair insurance? What coverage level z** would Fiona choose? Explain. (Note that co = 100 is an "avoidable fixed cost" which is only paid if she chooses strictly positive insurance coverage. However, the "marginal cost" of additional insurance, c1 = 70, 000, is the same as in the previous part.) 6. Suppose co = 100 and cı = 72,000. Is full insurance, that is, coverage level z =1 optimal? Explain.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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I need 4,5,6 answered
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Step 1
4. For any z>0, the cost of insurance is
The expected value of payout is given by
Hence the insurance is fair.
Fiona maximizes her expected utility given by,
Hence she will fully insure.
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