an expected utility maximiser owns a car worth £60 000 and has a bank account with £20 000. The money in the bank is safe, but there is a 50% probability that the car will be stolen. The utility of wealth for the agent is u(y) = In(y) and they have no other assets. risk-neutral insurance company is willing to insure the car at the premium of 7 = £2/3 for every one ound of coverage. ow much insurance coverage will the individual choose to buy? ppose that the firm is not charging the agent per unit of indemnity. Instead, it can propose to give the gent the total wealth ¤1 in the 'good state' and the total wealth zz in the 'bad state' in return for the agents entire wealth 7 = 60 000 + 20000 = 80 000 and W – L = 80 000 – 60 000 = 20 000, respectively. Below, we shall refer to the pair (#1, #2) as a ntract. ven the coverage chosen by the individual in Question 2, which of the following statements is correct? O a. There is a contract that is preferable to the outcome selected in Question 2 for both by the consumer and the firm. O b. There is NO contract that is preferable to the outcome selected in Question 2 for both the consumer and the firm. O c. Any contract that the agent would be willing to accept must be equal to the outcome selected in Question 2. O d. Any contract that the agent would be willing to accept must be Pareto efficient.
an expected utility maximiser owns a car worth £60 000 and has a bank account with £20 000. The money in the bank is safe, but there is a 50% probability that the car will be stolen. The utility of wealth for the agent is u(y) = In(y) and they have no other assets. risk-neutral insurance company is willing to insure the car at the premium of 7 = £2/3 for every one ound of coverage. ow much insurance coverage will the individual choose to buy? ppose that the firm is not charging the agent per unit of indemnity. Instead, it can propose to give the gent the total wealth ¤1 in the 'good state' and the total wealth zz in the 'bad state' in return for the agents entire wealth 7 = 60 000 + 20000 = 80 000 and W – L = 80 000 – 60 000 = 20 000, respectively. Below, we shall refer to the pair (#1, #2) as a ntract. ven the coverage chosen by the individual in Question 2, which of the following statements is correct? O a. There is a contract that is preferable to the outcome selected in Question 2 for both by the consumer and the firm. O b. There is NO contract that is preferable to the outcome selected in Question 2 for both the consumer and the firm. O c. Any contract that the agent would be willing to accept must be equal to the outcome selected in Question 2. O d. Any contract that the agent would be willing to accept must be Pareto efficient.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:QUESTION 2
An expected utility maximiser owns a car worth £60 000 and has a bank account with £20 000. The money in the bank is safe, but there is a 50%
probability that the car will be stolen. The utility of wealth for the agent is u(y) = In(3) and they have no other assets.
A risk-neutral insurance company is willing to insure the car at the premium of 7 = £2/3 for every one
pound of coverage.
How much insurance coverage will the individual choose to buy?
Suppose that the firm is not charging the agent per unit of indemnity. Instead, it can propose to give the
agent the total wealth æ1 in the 'good state' and the total wealth xz in the 'bad state' in return for the agents entire wealth
W = 60 000 + 20000 = 80 000 and W – L = 80 000 – 60 000 = 20 000, respectively. Below, we shall refer to the pair (21, 12) as a
contract.
Given the coverage chosen by the individual in Question 2, which of the following statements is correct?
O a. There is a contract that is preferable to the outcome selected in Question 2 for both by the consumer and the firm.
O b. There is NO contract that is preferable to the outcome selected in Question 2 for both the consumer and the firm.
O c. Any contract that the agent would be willing to accept must be equal to the outcome selected in Question 2.
O d. Any contract that the agent would be willing to accept must be Pareto efficient.
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