Consider an individual whose utility function over money is u(w) =1+2wt. (a) Is the individual risk-averse, risk-neutral, or risk-loving? Does it depend on w? (b) Suppose the individual has initial wealth ¥W and faces the possible loss of Y. The probability that the loss will occur is . Suppose insurance is available at price p, where p is not necessarily the fair price. Find the optimal amount of insurance the individual should buy. You may assume that the solution is interior. (c) Is there a price at which the individual will not want to buy any insurance? I not If so, find it. If no, explain.

Consider an individual whose utility function over money is u(w) =1+2wt. (a) Is the individual risk-averse, risk-neutral, or risk-loving? Does it depend on w? (b) Suppose the individual has initial wealth ¥W and faces the possible loss of Y. The probability that the loss will occur is . Suppose insurance is available at price p, where p is not necessarily the fair price. Find the optimal amount of insurance the individual should buy. You may assume that the solution is interior. (c) Is there a price at which the individual will not want to buy any insurance? I not If so, find it. If no, explain.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter7: Uncertainty

Section: Chapter Questions

Problem 7.5P

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7. Consider an individual whose utility function over money is u(w) = 1+2w.
(a) Is the individual risk-averse, risk-neutral, or risk-loving? Does it depend
on w?
(b) Suppose the individual has initial wealth ¥W and faces the possible loss
of Y. The probability that the loss will occur is . Suppose insurance
is available at price p, where p is not necessarily the fair price. Find the
optimal amount of insurance the individual should buy. You may assume
that the solution is interior.
(c) Is there a price at which the individual will not want to buy any insurance?
If so, find it. If no, explain.

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