nuumuum n acute uueauuua The study guide that's available from the textbooks online leaming centre has a number of practice questions with solutions For the following problems, only nal answers are provided. Please refer to the in-class examples and lecture notes for the solution procedures, Insurance Each of the following individuals is an expected utility maximizer. Their utility function is _1 With probability ', their wealth of will be reduced . Insurance coverage can be purchased for _ per dollar of coverage. Individual A: u = w'\"; 115 = 0.2 ; $100,000; to $25,000; y = $0.20 Individual 3: U = lnw ; 11,; = 0.4 : $80,000; by $60,000; y = $0.60 For each individual a) How much coverage will be purchased? With this insurance policy, what is wealth in each state of the world? b) Illustrate the best affordable policy (the solution to part a) in state-contingent spaces Risk pooling Individuals A and B each have jobs that pay per year. Each has a _ chance of being laid off Neither have employment insurance, so income would be zero if this happens, A's utility function is _. B's utility function is _, Scenario 1: $100,000 ; 5%;UA = M1\" ; uB = M\"5 Scenario 2: $150,000 ; 10% ; 0' = M1/3;UB = M\"2 For each of the above scenarios a) What is the expected value and variance of each individual's income? b) What is each individual's expected utility? Suppose that the individuals can pool their risk by agreeing to split their income equally no matter what happens, c) What is the expected value and variance of each individual's income? d) What is each individual's expected utility