Question
Consider a consumer who buys insurance. The consumer will have an income of =100. She can consume all of her income in case of no
Consider a consumer who buys insurance. The consumer will have an income of =100. She can consume all of her income in case of no accident, while she can consume $36 in case of accident. The probability of accident is 50%. At the price (premium) of , the consumer can buy an insurance in which she can get in case of accident. Let define 1 as the final consumption in case of accident and 2 in case of no accident.The consumer's utility from final consumption is ()=2. Suppose that an insurance company sells an insurance in which the company gets $4 profit. Would the consumer buy this insurance? If so, solve and for this insurance, and explain why the consumer buys such an insurance. Illustrate it using a graph.
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