2. Suppose that a certain agent has the following utility over her money u(M)=4M (which is the fourth root of M - just to be clear) Suppose that this agent has a yearly income of 20000 USD. In any year, she has a 5% chance to be laid off from her job, in which case her yearly unemployment allowance will be 5000 USD. a) What is going to be this agent's certainty equivalent? (2 marks) b) How much is this agent willing to pay for unemployment insurance, which fills the full gap between the agent's unemployment benefits and the wage she used to receive, for a period of one full year? (2 marks) c) Does the insurer who proposes this insurance necessarily have to be risk-neutral or risk-loving? If it can also be risk-averse, write down an example utility function and prove that with that particular utility function that you have come up with, it will insure the agent. (4 marks) 2) Consider the following estimated model: Yi=b0+b1X1i+b2X2i+ei a) Is the correlation between b1 and b2 important in this context? Why? Why not? Explain. (3 marks) b) Is the correlation between X1 and X2 important in this context? Why? Why not? Explain. (3 marks) c) Explain mathematically and using intuition, what consequences the correlation of b1 and b2 (or of X1 and X2 - whichever of the two pairs you think is important) has on your model estimates