Problem 16.1.6 To discourage people from breaking the traffic laws, society can increase the probability that someone exceeding the speed limit will be caught and punished, or it can increase the size of the fine for speeding. Explain why either method can be used to discourage speeding. Which approach is a government likely to prefer, and why? Problem 16.2.6 Jen has a concave utility function of U(W)=In(W). Her only major asset is shares in an Internet start-up company. Tomorrow, she will learn her stock's value. She believes that it is worth $144 with probability 2/3 and $225 with probability 1/3. What is her expected utility? What risk premium, P, would she pay to avoid bearing this risk? Problem 16.3.3 Jill possesses $160,000 worth of valuables. She faces a 0.2 probability of a burglary, where she would lose jewelry worth $70,000. She can buy an insurance policy for $15,000 that would fully reimburse the$70,000. Her utility function is U(X) = 4X05. a. What is the actuarially fair price for the insurance policy? b. Should she buy this insurance policy? c. What is the most that she is willing to pay for an insurance policy that fully covers it against loss? M Problem 16.3.6 After Hurricane Katrina in 2005 (see the Application "Limited Insurance for Natural Disasters"), the government offered subsidies to people whose houses were destroyed. How does the expectation that the government will offer subsidies for future major disasters affect the probability that risk-averse people will buy insurance and the amount they buy? Use a utility function for a risk-averse person to illustrate your answer. (Hint: See Solved Problem 16.5)