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3. A consumer has the utility function U (Y) = }1/2 where Y denotes income. There are 3 two states A and B each occurring
3. A consumer has the utility function U (Y) = }"1/2 where Y denotes income. There are 3 two states A and B each occurring with probability 1 / 2. If the consumer obtains 3 units of insurance, then her income in state A is Y = 16 S, and her income in state B is Y = 4+23/3. (a) What is the certainty equivalent of the income distribution when S = 0? (b) What is the expected utility of the consumer when S > 0? (c) How many units of insurance should the consumer obtain to maximize her expected utility? (d) Explain whether the insurance is priced at an actuarially fair level
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