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please only do: if you can teach explain steps Consider the insurance problem from class in which an agent with wealth w dollars has a
please only do: if you can teach explain steps
Consider the insurance problem from class in which an agent with wealth w dollars has a chance (0,1) of incurring a loss of dollars, where 0d, then the insurer pays her xd dollars if the loss occurs; if the agent buys x units of insurance with xd then the insurer pays her nothing if the loss occurs. (a) Carefully sketch this problem in (wg,wb)-space (where, as in class, wg denotes the decision-maker's wealth if the loss does not occur, and wb her wealth if it does). Solution: Starting from the no insurance point (w,w), the budget line follows a line segment of slope 1 down and to the left until it reaches (wqd,wqd). Then it follows a line of slope (1q)/q up and to the left until it reaches the point (wq,wqd). (Note that it never reaches the 45-line.) (b) Write the optimization problem describing the agent's choice of insurance if she is an expected utility maximizer with von Neumann-Morgenstern utility u(x). You do not have to solve this problem. Solution: If the agent buys x units of insurance, she ends up with wqx if the loss does not occur and max{wqx+xd,wqx} if it does. Therefore, the optimization problem is maxx[0,](1)u(wqx)+u(max{wqx+xd,wqx}). Consider the insurance problem from class in which an agent with wealth w dollars has a chance (0,1) of incurring a loss of dollars, where 0d, then the insurer pays her xd dollars if the loss occurs; if the agent buys x units of insurance with xd then the insurer pays her nothing if the loss occurs. (a) Carefully sketch this problem in (wg,wb)-space (where, as in class, wg denotes the decision-maker's wealth if the loss does not occur, and wb her wealth if it does). Solution: Starting from the no insurance point (w,w), the budget line follows a line segment of slope 1 down and to the left until it reaches (wqd,wqd). Then it follows a line of slope (1q)/q up and to the left until it reaches the point (wq,wqd). (Note that it never reaches the 45-line.) (b) Write the optimization problem describing the agent's choice of insurance if she is an expected utility maximizer with von Neumann-Morgenstern utility u(x). You do not have to solve this problem. Solution: If the agent buys x units of insurance, she ends up with wqx if the loss does not occur and max{wqx+xd,wqx} if it does. Therefore, the optimization problem is maxx[0,](1)u(wqx)+u(max{wqx+xd,wqx})Step by Step Solution
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