A consumer who enjoys risk has an initial wealth W and a utility function U(W). He faces a probability P of having an ac
Posted: Wed Apr 27, 2022 11:51 am
A consumer who enjoys risk has an initial wealth W and a utility function U(W). He faces a probability P of having an accident. In the event of an accident, he loses an amount L.
Assume that insurance is available at a price x per dollar of insurance.
a) Show that the optimal choice of this consumer is given by
(1-P)/P)*((U'(Wg)/(U'(Wb)) = (1-x)/x
where Wg = ax and Wb = W-ax-L+a
b) Show that, if x = P , this consumer is fully insured.
c) Show that, if x > P, this consumer partially insures.
Assume that insurance is available at a price x per dollar of insurance.
a) Show that the optimal choice of this consumer is given by
(1-P)/P)*((U'(Wg)/(U'(Wb)) = (1-x)/x
where Wg = ax and Wb = W-ax-L+a
b) Show that, if x = P , this consumer is fully insured.
c) Show that, if x > P, this consumer partially insures.