ISB Indian Sc X HW 2 .pc X G anekanta X . Anekant X G What do X Lesson 8 X *Ch-7-full * *ECN130c X Recall the X + V X - C coursehero.com/tutors-problems/Economics/9269588-Recall-that-in-an-expected-utility-model-with-a-good-g-and-bad-b-state/ S G A Apps Suggested Sites )/ Web Slice Gallery Imported From IE Where does photos... Labhle & Banner PS China's Quantum S... Current Affairs May.. > Other bookmarks Course Hero Find study resources Q Question Recall that in an expected utility model with a good g and bad b state of nature, preferences over At Ask Expert Tutors state-contingent consumption bundles (cg, cb) are represented by the utility function.EU(cg, cb) = (1 - Let our expert tutors help you get unstuck p)U(cg) + pU(cb) (1)for some function U, where p is the probability of the bad state occurring. 24/7. Answers in as fast as 15 minutes. Suppose that Bob has preferences given by (1) with U(c) = vc, and that in the absence of insurance his consumption would be (cg, cb) = (14, 5). In other words, the loss/damage Bob faces in the bad Enter a question state is 9 consumption units. Suppose that p = 1/5 and that an insurance company offers Bob the state contingent consumption bundle (-t, 5t-t), where t 2 0 is the premium Bob chooses to pay and 5 t is the amount of insurance coverage he receives in the bad state. That is, Bob can choose to add(-t, 5t - t) of consumption to his current consumption. 2 20 questions remaining (a) (15 points) What does it mean to say that an insurance contract is actuarially fair? Is the above contract (state-contingent consumption bundle (-t, 5t - t)) actuarially fair? Ask a question (b) (25 points) How much of the above contract will Bob purchase, i.e. what is the optimal level of t from his perspective? (Hint: In class, the consumer chose the total amount of insurance coverage. In this problem, the consumer chooses the premium. Both approaches yield the same result.) (c) (10 points) What will his state-contingent consumption be after he purchases t units of this contract? 1_zmlA9Cnvw-ah..jpeg Show all X 39.C w 9 X ENG 15:46 Mostly sunny KO 2 IN 14-05-2022