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3. [5pts] Robinson Crusoe and Friday are shipwrecked on a desert island. Having taken Economics 4001, they know that they should create a market-based system

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3. [5pts] Robinson Crusoe and Friday are shipwrecked on a desert island. Having taken Economics 4001, they know that they should create a market-based system for allocating their scarce resources efficiently, so they develop their own currency. Robinson Crusoe is risk-averse, with utility for dollars given by the graph on the right, while Friday is risk-loving, with utility for dollars given by the graph on the left. Each of them begins with Y dollars, but each faces a 50% (independent) risk of having L dollars stolen by pirates. True or false: Robinson and Friday can increase social welfare by creating their own market for pirate insurance. u u U(W) UIWI _

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