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Problem 2: Moral Hazard (25 points). Kennedy has some nonwage income $30,000 and a dangerous job that pays $60,000. If Kennedy chooses a high level
Problem 2: Moral Hazard (25 points). Kennedy has some nonwage income $30,000 and a dangerous job that pays $60,000. If Kennedy chooses a high level caution, she 1will get injured with probability p = 0.1. If Kennedy chooses a low level of caution, she will get injured with probability p = 0.5. If she gets injured, she can no longer work. Low caution is costless, but high caution costs Kennedy $10,000. Kennedy's expected utility follows an = (1 are. am, where 09 represents Kennedy's consumption if she does not get injured and Cb represents Kennedy's conslnnption if she gets injured. a) Suppose there is no insurance. What is Kermedy's expected utility from choosing low caution? What about from choosing high caution? Will Kennedy choose low or high caution
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