Q1

A person has wealth of $38,025. If they have an accident they must spend $21,125 on car repairs. Their utility function is given by U = (x)^0.5, where x is equal to their wealth. They do not get into an accident with a 90% chance and they get into an accident with a 10% chance.

Without insurance, what is the absolute value of their MRS between states? Assume the bad state is on the vertical axis. (Round to the nearest two decimal places.)

Q2

A person has wealth of $40,000. If they have an accident they must spend $30,000 on car repairs. Their utility function is given by U=(x)^0.5, where x is equal to their wealth. Theydo not get into an accident with a 95% chance and they get into an accident with a 5% chance.

What is the total fair premium for full insurance for this person?