Consider the insurance problem from class in which an agent with wealth w dollars has a chance 7 € (0, 1) of incurring a loss of dollars, where 0 < l< w. She can purchase insurance at a price q € (0, 1) per unit, up to a maximum of l units. Unlike the problem from class, there is a "deductible" d with 0 < d < l. If the agents buys x units of insurance with x >d, then the insurer pays her x-d dollars if the loss occurs; if the agent buys x units of insurance with x ≤ d then the insurer pays her nothing if the loss occurs. (a) Carefully sketch this problem in (wg, w)-space (where, as in class, wg denotes the decision-maker's wealth if the loss does not occur, and w, her wealth if it does).

Consider the insurance problem from class in which an agent with wealth w dollars has a chance 7 € (0, 1) of incurring a loss of dollars, where 0 < l< w. She can purchase insurance at a price q € (0, 1) per unit, up to a maximum of l units. Unlike the problem from class, there is a "deductible" d with 0 < d < l. If the agents buys x units of insurance with x >d, then the insurer pays her x-d dollars if the loss occurs; if the agent buys x units of insurance with x ≤ d then the insurer pays her nothing if the loss occurs. (a) Carefully sketch this problem in (wg, w)-space (where, as in class, wg denotes the decision-maker's wealth if the loss does not occur, and w, her wealth if it does).

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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